In an effort to combat inflation, the Federal Reserve Board (also called the Fed) has already raised interest rates several times this year and plans to continue to raise rates throughout 2022. Rising interest rates can have a ripple effect on your finances, affecting everything from mortgage rates to the interest you earn in your savings account. Here are four ways rising interest rates can impact you:
As the Fed raises its rates, it typically impacts the interest rates on consumer loans. This can affect anyone looking to take out a new loan, from a mortgage to a personal loan. The higher the interest rate, the higher the monthly payment will be for the same amount. This can make it more difficult to qualify for or afford a loan of the same size. If you're looking to take out a loan, it's a good idea to shop around for the best rate.
If you have a permanent life insurance policy, such as whole or universal life insurance, depending on the type and size of loan you are looking for, a life insurance loan may be an alternative. Permanent life insurance policies typically include a cash value component which grows over time. You can then borrow against the cash value for any reason. This is good news for universal and whole life insurance policyholders (and, possibly, an answer to the question, is whole life insurance worth it?)
Loans with a variable interest rate
Having a loan with a variable interest rate means the interest rate can go up or down with market rates. When interest rates rise, people with variable rate loans may see their monthly payments increase. If you have a lot of debt, or multiple loans with variable interest rates, a hike in interest rates may make it difficult to keep up with payments. If you have debt with a variable interest rate, you may want to consider refinancing or, depending on the size of the loan, making extra payments to pay it off sooner.
When interest rates rise, it can have a direct impact on savings accounts and CD accounts. As rates go up, the interest earned on these accounts goes up as well. Consumers with savings accounts will see their rates adjusted automatically, while CD account holders will have to roll the money over into a new account to get the higher interest rate. Overall, rising interest rates mean people with a lot of money in savings may see a significant increase in their earnings.
CAUTION: Loans taken against a life insurance policy can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon surrender, lapse or the death of the insured. Repayment of loans from policy values upon surrender or lapse can trigger a potentially significant tax liability and there may be little or no cash value remaining in the policy to pay the tax. The policy will lapse if loans become equal to the cash value while the policy is in force and additional cash payments are not made.
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