Interest Rate Hike: You May Be Surprised What It Means For Your Wallet

The dreaded interest rate hike of 2015 finally happened last week, with the Fed raising the bottom line interest rate from zero percent to 0.25 percent. While it does not sound like much, an interest rate hike can have long-term consequences for individuals looking to make big purchases in the coming year or more. Cars, homes, even medical expenses could become more expensive with the hike in interest rates.

First, let’s explain what the interest rate is and how it trickles down to the average everyday American. The interest rate raised by the Federal Reserve last week is the rate banks pay to borrow money. That money is then lent to the bank’s customers. The interest rate also guide banks in what they will pay for savings accounts, certificates of deposits, and more. So the lower the interest rate, the lower return you receive for your hard-earned cash sitting in an account.

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“First, it is important to understand that interest rates are where the demand and supply of money intersect worldwide. Since the invisible hand of capitalism has difficulty finding and maintaining an interest rate, which is sustainable for overall economic objectives, the Federal Reserve Bank was established to guide monetary policy, which is a simple way of saying guiding domestic interest rates.”

Since the Fed raised interest rates, the first place many consumers will feel the pinch is the cost of purchasing a new car. In order to stimulate the economy following the crash of 2008, the Fed kept rates low or at zero, since the prospect of an interest rate hike could damage the then-fragile economy. The result was lower interest rates on auto loans, with some dealerships and manufacturers making ultra-low offers to those with top credit to lure them into big purchases. Those rates — some as low as 1.9 percent — will likely be a thing of the past.

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“The Mortgage Bankers Association is predicting the interest rate for 30-year fixed-rate mortgage will be around 4.8 percent at the end of 2016, that’s an increase of less than one percent.”

For individuals not in the market for a new home or a new car, will there be any real benefit to an interest rate hike? Absolutely. Since savings accounts and certificates of deposits see their rates set according to the bottom-line number from the Fed, the higher interest rate set by the federal government means better returns on savings. But it is not guaranteed. Forbes recommends looking to online savings accounts instead of visiting your brick-and-mortar bank.

“The online savings account market is much more competitive. It is possible to earn 1.12% online, and the competition continues to intensify. You should keep an eye on the internet bank interest rates after the expected rate hike.”

Forbes does go on to note that interest rate hikes are expected to hit credit card customers, as well. So if you are a saver, but sure to keep the cards paid off so you don’t lose any interest earned on your savings and you stay in the green instead of the red.

[Photo by Joe Raedle/Newsmakers/Getty Images]