How Low Interest Rates Can Impact Your Personal Finances

Maybe you’ve heard that the interest rate target is near zero, but you’re not sure what that means or how it impacts you and your finances. The target interest rate can be used to stimulate or regulate the economy and has several impacts that can influence the broader economy and your individual finances.

Huntington is here to help you understand how interest rates are set and the positive and negative effects those rates can have on your financial situation.

How Does the Federal Reserve Set Rates?

The central bank of the United States, otherwise known as the Federal Reserve or “the Fed,” was created to provide the nation with a safer and more stable financial system^†. One of the functions the Fed performs to achieve its congressionally mandated goals of “maximum sustainable employment” and “low and stable inflation” is to set a federal funds rate^‡.

Essentially, the federal funds rate is the interest rate banks can charge other banks for overnight loans^§. Since banks earn profits by providing loans at a higher interest rate than they borrow from other banks, this is a highly effective tool to raise or lower consumer interest rates. So, even though the Fed doesn’t have the authority to set a national interest rate, it serves as a benchmark for consumer lending institutions.

What Happens When Interest Rates Fall?

When interest rates fall, it can be beneficial to familiarize yourself with some of the ways you might be impacted while rates are low. Since interest rates can incentivize certain behaviors, your situation could determine whether you view some of these impacts as benefits or detriments.

With lower interest rates, consumers can typically lower interest rates on loans; however, interest on savings accounts may decrease. We’re here to help you understand these impacts and make better decisions based on your individual needs.

What are the Benefits of a Low Interest Rate?

Lower interest rates can influence borrowing costs, which can mean lower interest rates on loans and lower credit card rates. If you already have a mortgage or a college loan, lower interest rates might mean it is a good time to evaluate your current terms and consider refinancing or locking-in a fixed rate now, to avoid higher interest rates in the future.

If you’ve been considering a large financial decision, such as buying a house, a home improvement project, or purchasing a car, a low interest rate can provide a better opportunity for a more favorable loan if you meet the qualification requirements of the lending institution.

Also, credit card APRs with variable rates tend to drop when the Fed cuts rates. So, if you’re trying to catch up on credit card debt, lower rates can provide a little help.

Your investments can also benefit from lower interest rates. Since lower rates incentivize borrowing, businesses can make investments in equipment, real estate, and other expansions that can help increase stock prices. On the other hand, lower interest rates tend to reduce returns on bonds. Depending on your asset allocation, lower interest rates could affect you positively or negatively.

What Else to Consider with Low Interest Rates

While borrowing may provide better terms when interest rates are low, it’s still wise to be cautious. In contrast, some areas that could offer lower rates of return when interest rates go down include savings accounts, certificate of deposits (CDs), bonds, and money market accounts. 

Lower Interest Rates on Savings Accounts

While your savings account will be earning less interest when interest rates are low, it’s still important to keep saving. Especially if you haven’t built up an emergency fund, you’ll want to save in the case of an unexpected major event.

For most people, if you have an established savings plan and financial goals, a lower interest rate will most likely not be a significant reason to materially change your saving strategy.

If you bank with Huntington, our digital banking tools in The Hub, can help you navigate difficult financial decisions, from tracking spending and budgeting to setting savings goals and managing bills. We can help you make a plan that addresses your goals and gives you the tools to help you stay on track.

Remember, every situation is unique and the steps you take should depend on your financial goals. If you have any questions about how to take advantage of low interest rates or want to learn more, contact us!