If you’ve been paying attention to the news, you’ve heard about rising interest rates. The U.S. Federal Reserve Board (The Fed) has already increased the prime rate three times since the 2016 elections, and it’s expected to go up again. The prime rate is important to note because it’s the rate many banks use as a benchmark for setting the rates they use for home equity loans, lines of credit, mortgages and credit cards.
With all this in mind, you may be wondering how the current rate environment will impact any loans you want to take out. Let’s take a look:
Types of Interest Rates
There are two types of rates you can look for in your loans: fixed-rate and variable rate:
- A fixed-rate is where the interest rate does not fluctuate during the term of the loan. The rate you’re given when the loan closes remains the same for the entire term of the loan.
- A variable rate does just that – it varies. When your loan closes you may have been given a rate of “prime + 1” or “prime + 2” – this means that if the prime rate increases, so does your interest rate. A variable rate can change multiple times throughout the term of the loan.
In a rising rate environment, fixed-rate loan products are growing in popularity. Since fixed-rates aren’t tied to the prime rate, it’s easier to understand and anticipate the payment you can expect each period.
What are My Loan Options in a Rising Interest Rate Environment?
Over the last few years, revolving lines of credit have been a popular option for consumers looking for loans. With rising interest rates, I’m now seeing a lot of interest in fixed-rate installment loans.
Installment loans can be used for the same kinds of things as lines of credit – you may use it for debt consolidation, major purchases, home renovations, etc. These loans provide a variety of features that take the guessing out of what your monthly payment will be, such as:
- Fixed interest rate
- Fixed term
- Fixed monthly payment
In addition, there is no penalty for paying ahead for an installment loan, so if you want to pay it off sooner and have the means to do so, you can. The interest paid on installment loans may be tax deductible, so be sure to consult with your tax advisor.
Overall, with interest rates on the rise, keep an eye out for lending products with fixed rates to avoid significant increases in your payments. A popular option is installment loans, which can be used to fund nearly any type of purchase you need to make – and even for debt consolidation.
- Continue learning about managing your personal finances with our many articles, videos and infographics.
- Learn about the difference between interest rate and APR here.
- Contact me or visit with your banker to learn more about which fixed-rate loans may be available to you.