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Fed Rate Increase’s Impact on Credit Cards, Mortgage, Student and Auto Debt

The Federal Reserve’s decision to increase its benchmark interest rate will most likely reach beyond Wall Street and enter into most American lives. This is the fifth rate increase since the financial crisis.

Those will credit cards, student debt, auto debt, and also mortgages will see a small but instant increase in their interest rates.

During the Fed’s final meeting of the year, the board of governors set the target federal funds rate between 1.25% and 1.5%. Experts suggest that the psychological effect of this third increase of 2017 may be dulled as more and more consumers become used to such increases.

While this may be the final increase of 2017, there are expected to be more in the upcoming years. The Fed predicted in September that in 2018 it would increase three times and twice more in 2019.

Home loans typically come with 15 to 30-year terms, making homeowners less sensitive to these incremental rate increases. However, homeowners are not completely protected from the impact of these rate increases. Because of these increases, the central bank makes borrowing more expensive for commercial banks, which in turn gives these institutions an incentive to pass these costs on to their customers.

While some homeowners rely on easy ways to increase their home’s value, like landscaping, which increases a home’s resale value by 14%, this may no longer be the case. In fact, if mortgage rates continue to increase, Americans may be less inclined to become homeowners in the first place. This could mean trouble for the real estate industry if homeowners hold off on refinancing their loans.

According to Fed Data, credit card debt already has interested rates over 13% on average. This latest rate increase could further the expense of using credit cards. While homeowners and car loan borrowers may not see a direct hit right away, those who use credit cards are immediately impacted by this increase.

While students who have a fixed-rate government loan will not see a change, the interest rates on private variable-rate loans are expected to increase. This means students who plan on borrowing money for college in the future may see an increase in rate options. Additionally, private lenders are expected to raise variable rates on personal loans they approve.

Ashley Norwood, a consumer and regulatory adviser with American Student Assistance, a nonprofit group assisting student borrowers said, “When there’s a hike in the rate, you’ll typically see a hike throughout the whole private lending world as well. In normal years, the increases aren’t significant enough to be alarming — an extra $2,000 over the course of a 20-year, $30,000 loan isn’t making or breaking you usually.”

However, it’s important to note that repeated rate increases could cause harm, especially for those who are vulnerable borrowers who have lower credit scores.

Car owners are expected to be impacted much less than credit card and student loan holders. With this increase, new auto loans may be just a few dollars more than those who have existing loans. WIth 43% of people choosing to finance their vehicle, auto loans have been relatively affordable for some time now.

Banks have typically been offering interest rates under 4.5% for four and five-year contracts. Additionally, these loans are usually offered with fixed rates rather than variable rates. Furthermore, eight in 10 new car sales are being financed through a car dealership, bank affiliated with an automaker, or lease, according to Jessica Caldwell, a senior analyst at Edmunds.

Despite an estimated 107 million vehicles to be manufactured in 2020, according to a forecast by PwC, car dealerships have seen a drop-off in sales since last year. With a sizable inventory of current-year models, dealers may temporarily ignore the effect of the Fed increase to offload their inventory before the new year.

According to Caldwell, “When sales are going down, there’s more pressure for automakers and dealers to keep market share. When things are very competitive, they’re more willing to eat the cost by offering low-interest-rate financing even if they have to pay more for their loans.”

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