Making the Most of Lower Interest Rates  

Key takeaways: 

• Falling interest rates could make it more affordable to pay down debt, buy a home or vehicle, or improve your home.     
• Competitive rates on savings vehicles are still widely available. 
• It could be a good time to tap home equity. A home equity agreement is a good option, particularly for those homeowners who still may not qualify for a good rate on loans because of credit score or income restrictions.  

Interest rates are falling and may continue a downward trend in the coming year. What does that mean for you as a consumer?  

When the Federal Reserve (Fed) lowers interest rates, as it has now done twice, consecutively, the rates on consumer loans – such as credit cards, auto loans, personal loans and mortgages – generally also go down. This can make it more affordable for consumers to pay down debt, tackle home improvements, buy a house or car, or make other larger purchases. 

On the flip side, lower interest rates also mean lower rates for savings vehicles, such as savings accounts, money markets, and certificates of deposit. 

However, it’s important to understand that falling interest rates are not the same thing as low interest rates. Let’s take a look at what the latest rate cuts could really mean for a consumer. 

Credit cards 

The average credit card interest rate in early November was almost 24.61%. That is indeed lower than the record-high average rate of 24.92% in September – but certainly not by much. Analysts expect high rates on credit cards – and especially retail store cards – to persist through the holiday season. 

Yet even a slight reduction in interest rates can be a great incentive to pay off credit card debt. If you are carrying debt and your credit score is still good, you may be able to qualify for a zero- or low-interest balance transfer. You would transfer your existing high-interest credit card debt to the new card with the low rate and pay that balance off. However, these low rates are only available for a specific amount of time, so you MUST be able to pay off the balance in full within that period.  

You also may be able to qualify for a debt consolidation (personal) loan that carries an interest rate lower than what you have on your credit card(s). With the proceeds from the new loan, you would pay off your balances on the higher-interest cards, then just have one payment each month at the new (lower) rate. However, you must be able to qualify for the loan and qualify for a good rate. Lenders generally look at credit scores as well as debt-to-income ratios when considering which rates to offer.  

Using home equity to pay off credit card debt 

Homeowners could also look to home equity to pay off high-interest credit card debt. With the dramatic rise in housing prices over the past few years, many have accumulated substantial levels of equity. 

Rates on home equity lines of credit may move slightly lower in the coming months, presenting an opportunity for homeowners who can qualify for those lower rates. For homeowners who may not have the credit scores to qualify for the loan (or the best rates on those loans), or who do not want another monthly debt payment, a home equity agreement (HEA) is an option. 

With an HEA, homeowners receive cash upfront in exchange for a portion of their home’s future value. Since it’s not a loan, there are no monthly payments and there is no interest rate to worry about. The qualification threshold is lower than for traditional loan products, and income requirements are flexible.  

New loans 

The Fed’s actions do influence mortgage rates, but it can take some time. Mortgage rates are also impacted by other factors, including inflation, bond yields and risk. In fact, consider that after the Fed cut rates in September, mortgage rates actually rose.  

That said, if the Fed cuts rates further, consumers could see a drop in mortgage rates over time. This may make buying a new home more affordable and attractive. It also could make refinancing an option for those homeowners who purchased a home recently at a very high rate. For now, rates remain high. Unless and until the Fed continues to cut rates consistently, the impact on consumers will be minimal.  

Rates on auto loans may fall more sharply. Smart consumers who shop around may be able to lock in a competitive rate on a new or used vehicle. 

Savings 

While it’s true that interest rates on traditional savings accounts, money market accounts and CDs will fall somewhat, plenty of financial institutions still offer competitive rates that easily outpace inflation. It is still vitally important to build, and maintain, a solid emergency fund for those inevitable unexpected expenses, and to save for your goals – the things you really want to do and have in your life. 

In addition, most experts indicate that the Fed’s lowering of rates is a sign that the economy is slowing. That, plus uncertainty with a new administration’s economic policies, means that unemployment could rise. Knowing you can rely on savings in the event of a job loss, reduction in hours or change in position is essential.  

What to do? 

Lower interest rates could make it more affordable to pay down debt, buy a home (or a car) or get a loan to improve your home. Refinancing might also be a future option if you purchased when rates were particularly high. If you are looking at ways to make the most of slightly lower interest rates, consider taking the following steps. 

• Pay off high-interest credit card debt: Consider a balance transfer, debt consolidation loan or home equity proceeds to eliminate the debt.  

• Shop around: Find the best available rates for any loans (personal, debt consolidation, auto, mortgage). Remember than an HEA could be an option for paying off debt or funding home improvements, particularly for those homeowners who may not qualify for a good rate because of credit score or income restrictions.  

• Save on a regular basis: Today’s slightly lower rates are not a license to forego savings. Take advantage of still-high rates that outpace inflation, whether in a traditional savings account, money market account or CD. 

• Be careful with your spending. Sometimes, consumers may look at slightly lower rates as motivation to borrow. At the same time, when the cost of borrowing seems lower, price increases on goods and services can become more apparent. Follow your budget (yes, you should have one) and work to continually improve your financial health.