A rise in interest rates, generally due to inflation, is a big concern for both households and businesses. From increased borrowing costs to dwindling savings growth, we uncover 20 troubling ways rising interest rates are affecting your finances:
Increased Mortgage Payments
If you have a fixed-rate mortgage you may not have to worry about interest rates too much, but you will be concerned if you have a variable-rate mortgage. Rising interest rates mean your monthly mortgage payments will be higher, meaning you may struggle to meet the costs of your other outgoings.
Increased Credit Card Interest
Credit card debt becomes more expensive as interest rates rise as most cards have variable rates. When interest rates go up, your monthly payments may become unmanageable which makes it harder to pay off balances and results in more money spent on interest.
Unaffordable Homes
Higher interest rates make borrowing more expensive and, therefore, homes become less affordable for a lot of people. Potential homebuyers face higher monthly payments which reduces their purchasing power and forces buyers to settle for cheaper homes in areas they may not find desirable.
Higher Auto Loan Costs
Rising interest rates also affect auto loans, leading to higher monthly payments for new and used vehicles. For families already struggling with inflation, the additional cost of financing a car can stretch budgets even thinner, delaying necessary purchases.
Decreased Savings Account Value
Although higher interest rates theoretically increase savings account yields, banks are often slow to pass these benefits to consumers. As a result, the real purchasing power of savings may not significantly improve, especially when inflation outpaces these small increases in returns.
Student Loan Repayments
If you have a private student loan that’s tied to variable interest rates, you may see your monthly payments increase significantly. With federal student loans likely unaffected, this disproportionately impacts private loan borrowers, creating additional financial strain for recent graduates.
The Strain on Small Businesses
The impact of high interest rates on small businesses often mean they struggle to stay afloat. If you rely on business revenue, higher borrowing rates may directly affect their personal finances through reduced profitability, layoffs, or even permanent closures.
Issues With Refinancing Debt
If you’re planning to refinance a mortgage, student loan, or other debt, rising rates make the process less beneficial. Higher interest rates mean that refinancing mortgages or loans is unlikely, sometimes meaning people are stuck with monthly outgoings.
Reduced Access to Credit
When interest rates are high, lenders usually tighten their rules on lending so there’s no risk of borrowers not being able to make repayments. If you were planning on securing credit, you may find it more difficult unless you have a strong credit rating and can prove you can meet repayments.
Diminished Retirement Account Growth
Rising interest rates negatively impact the stock market, causing volatility that impacts retirement savings. If you’re part of a 401(k) or IRA scheme, expect to see fluctuations in forecasting.
Higher Cost of Living
High interest rates mean higher prices paid on goods and groceries as businesses pass on the increase in their expenses. You’re likely to experience higher prices for everything from food, clothing, utility bills and entertainment.
Loss of Home Equity
Higher interest rates can cool housing markets and slow down the rate of appreciation. For homeowners relying on their home equity for future borrowing or financial security, this slower growth means fewer opportunities to leverage their home’s value.
Government Impacts
When governments feel the impact of high interest rates there is a risk that they reduce public spending on programs such as education and healthcare. When governments cut local funding for essential services residents are often forced to shoulder these costs themselves, having to pay for fuel instead of public transport, for example.
Debt Repayment Burden
For households carrying significant debt from mortgages and loans, rising rates add a significant burden. Everything from mortgage repayments to monthly credit cards are impacted by high interest rates leaving household budgets stretched to the max.
Volatile Investment Portfolios
Rising interest rates often lead to volatility in financial markets, with bonds may losing their value, and stocks can experience price swings, leaving investors with uncertain returns. If you’re someone who likes to take risks with investment income opportunities, you may face prolonged periods of financial instability.
Lower Demand for Homes Hurts Sellers
Selling your home when interest rates are high might be tricky as buyers are nervous about mortgage repayments. It may be that you have to be patient when finding a buyer or wait until interest rates fall until you put your house on the market.
Strain on Emergency Funds
Higher interest rates often coincide with economic uncertainty, prompting households to rely more on emergency funds .But, emergency funds may run-out quickly when facing higher costs for debt repayment, utilities, and groceries which leaves families in a vulnerable position.
Increase in Personal Loan Repayments
People often take out personal loans for major purchases, such as cars or home remodelling or to consolidate debt. But, with the risk of not being able to meet monthly repayments due to interest rates, it’s best to wait for rates to return to an affordable amount before taking on new debt.
Reduced Economic Growth Affects Employment
Rising interest rates can slow economic growth as businesses reduce spending and investments. A lack of economic growth often results in job losses and considerable financial insecurity for many households relying on steady employment.
Psychological Stress of Rising Rates
High interest rates not only affect our finances but can also affect your mental health. As interest rates stretch out finances, you may worry about paying bills and saving for the future, often leading to anxiety and depression.
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