The Federal government moderates interest rates. The rise and fall of interest rates depend on the state of the economy. Interest rates often rise when the economy is doing well and fall during a recession.
A low interest rate is a mixed blessing. It means that it will be easier to get loans, because the payments are more manageable. This encourages people in need of money to take out bank loans.
But a falling interest rate also affects savings. Savings accounts, CDs (certificates of deposit) and bonds can have lower returns on investment than usual. Since the rates are dependent on the economy and the stock market, this can perpetuate more debt and less income for everyone.
It is generally easy to sense when interest rates will fall. People with investments and basic financial acuity typically monitor the state of the market. Problems with the economy are featured regularly in the news. Once falling stocks make the headlines, we can expect interest rates to fall once the government steps in. You should take certain actions in response:
- Adjust High-Interest Rate Debts. A drop in interest rates can influence debt slowly. Once the interest rate does begin to go down, you can then try to get lower rates for outstanding debts with new loans.
- Refinance Mortgages. Mortgage interest rates are one of the first to drop because of government intervention. The government buys multiple mortgage-based bonds so that homeowners will need to pay less in their house loans.
Once the interest rates are down, homeowners can refinance their mortgages. They can check with the same lending company if they can avail themselves of the lower rates. If that is not possible, there are other lenders who are willing to refinance one or more mortgages.
It is considered best to pick a low fixed mortgage rate, so that the same low rate will apply for the duration of the entire payment plan. Some prefer adjustable or variable mortgage rates wherein the rates change throughout the loan term. The latter kind of mortgage rate may not be beneficial, in case the interest rate rises during the duration of the mortgage contract.
- Negotiate with Credit Card Companies. It takes longer for credit card companies to adjust their interest rates. Once the rates drop, some may automatically adjust the rates on your bill without advance notification. You may suddenly notice that lower payments are required on your charges.
If the interest rate is not changed immediately, you can contact the company to ask if you can have the lower rate. Companies often agree to this, since the changes reflect the market. A denial of the request can lead customers to apply for another credit card that follows the decreasing trend in interest rates.
- Buy Property if Possible. Low interest rates make it an ideal time to buy property. If you already have the budget and plans to purchase a car or home, now is the right time. The low interest rate on debts means that house and car loans are more affordable.
- Watch Your Savings. Savings interest rates decrease almost immediately once the economy declines. If you are unprepared, your savings may be stuck in accounts that offer minimal return for your investment.
- Check the Alternatives. Once the interest rates decline, begin looking for other banks offering higher rates. Some banks will offer rates with only a slight difference. But this results in accumulated increase in investment returns in the long run.
- Maximize CDs and Time Deposits. CDs and time deposits are different kinds of deposits where depositors agree to hold their funds for specific durations. The interest will remain at a rate throughout the duration. If you sense that interest rates are about to fall, invest in CDs and time deposits to prevent being affected by the decrease.