After the US Federal Reserve increased interest rates to 0.75% last week, consumers have been warned to expect a hike in the amount of interest they pay on loan repayments.
The lending rate was recently increased by the largest amount since 2008. The rate is still low; however, it’s predicted that it will continue to rise throughout the year to tackle rising inflation.
As the federal funds rate is not paid directly to consumers, this news mostly affects banks, as it directly impacts the interest rate they pay when borrowing from the Federal Reserve.
But, higher costs are often passed on to borrowers and it can influence the interest rates on various types of consumer loans, making it a concern for struggling consumers.
For example, the rate consumers pay on vehicle loans often increases, and many auto lenders change the rates they offer their customers depending on the federal funds rate.
It could also mean a rise in interest rates for credit cards and personal loans. Credit card debt is already at a record high, resulting in borrowers struggling to pay back their debts.
Mortgage rates aren’t usually affected by the federal funds rate, as they are aligned with the yield on the Treasury Department’s 10-year bond, but this has also been increasing due to higher inflation and predictions of the Fed’s action.
In fact, mortgage interest rates in the US are now over 6% for the average 30-year fixed-rate mortgage – although this varies depending on the borrower’s circumstances, such as their credit score, income, and the amount they have as a down payment.
According to NerdWallet, “Mortgage rates tend to go up and down in anticipation of Fed rate moves, which is a way of saying that the Fed increase was already ‘baked into’ mortgage rates. In other words, mortgage rates are more likely to go up or down before Fed meetings than after Fed meetings. Over the next week or two, we probably won’t see big movements in mortgage rates like we did last week.”