The United States Federal Reserve, The European Central Bank, and many central banks around the world, continue to raise interest rates for the seventh time in the year 2022 to combat stubborn inflation. These interest rate raise have pushed benchmark borrowing rates to a more than 4.25 percent.
By raising the interest rates, the cost of loan become more expensive, causing people reduce their borrow and spending, effectively slowing down the economy, pace of price increases, and the inflation.
For most people this is a good news because prices are starting to reduce. However, there are some households that will be hurt by the increase in the interest rates.
For instance, the majority of the loans, especially credit cards, come with a variable rate, which means the cost of both new and old loans will increase.
What The Interest Rate Hike Means For You?
The increases in the prime rate sent financing costs even higher for many other forms of consumer debt. On the flip side, higher interest rates also mean savers earn more money on their deposits. The raised interest rate pushed:
- Credit card rates at a record high and will still increasing.
- Auto loan rates at an 11-year high
- Home equity lines of credit at a 15-year high
- . Savings account and Certificate of Deposit CD yields reached higher since 2008.
The Effects On Mortgages
Although 15-year and 30-year mortgage rates are fixed, anyone seeking a new home has lost considerable purchasing power, partly because of the interest rate hikes. After the raise, the mortgage rates are at a more than 10-year high.
Adjustable-rate mortgage ARMs and home equity lines of credit HELOC, are pegged to the prime rate. As the interest rate raised, the prime rate does, as well, and these rates follow suit. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.3 percent from 4.24 percent earlier in 2021.
Effects On Credit Cards
At the end of 2022 the most credit card annual percentage rates are more than 19 percent, up from 16.3 percent at the beginning of the year 2022. However, with the interest rate hike, the rates on the credit cards aren’t going up only on new cards. The rate you’re paying on current credit card is up, too.
Further, households are increasingly leaning on credit cards to afford basic necessities since incomes have not kept pace with inflation, making it even difficult for those who are living on paycheck to paycheck.
Car Loans
Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans. So if you are planning to purchase a car, you’ll pay more beginning from 2023.
In the United States the average interest rate on a five-year new car loan is 6.05 percent in December 2022, up from 3.86 percent at the beginning of the year.
Paying an annual percentage rate of 6.05 percent instead of 3.86 percent could cost consumers roughly 5,731 USD more in interest over the course of a 40,000 USD, a car loan for 6 years.
Student Loans
In the United States, the interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99 percent, up from 3.73 percent last year and 2.75 percent in 2020-21. It won’t budge until middle of 2023: Congress sets the rate for federal student loans each May for the upcoming academic year based on the 10-year Treasury rate. That new rate goes into effect in July 2023.
Private student loans tend to have a variable rate tied to the Libor, prime or Treasury bill rates — and that means, as the interest rate raises, those borrowers are also paying more in interest. In 2022, average private student loan fixed rates range from 2.99 percent to 14.96 percent, and 2.99 to 14.86 percent for variable rates.
Savings Accounts
On the upside, the interest rates on some savings accounts will also be higher after consecutive rate hikes.
While the United States Federal Reserve Fed has no direct influence on deposit rates, the rates tend to be correlated to changes in the target federal funds rate. The savings account interest rates at some of the banks, which were at lowest during most of the Covid-19 pandemic, in December 2022 are up to 0.24 percent, on average.
Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 4 percent, much higher than the average rate from a traditional.
Interest rates can vary substantially, especially in such the interest rate environment in which the central banks around the world have raised their benchmark rate to its highest level in more than a decade.