September 29, 2022

Unitranche

Supportive Business Potential

What will be more expensive

To combat untamed inflation, the Federal Reserve raised its key interest rate by another 0.75% on Wednesday — further increasing how much consumers will pay on debt like credit cards, mortgages and other loans.

The federal funds rate, which indirectly determines the cost of loans, has increased from near-zero to a range of 2.25% to 2.5%. This is the fourth rate hike in five months.

Rate hikes increase the costs of borrowing money, which can help slow inflation. But they also result in added costs for consumers already dealing with elevated prices for goods and services.

Here’s a look five things that will become more expensive:

1. Credit cards

With the Federal Reserve raising interest rates, your credit card’s annual percentage rate will likely increase within a couple of billing cycles. That means you’ll be paying more on any outstanding credit card debt that isn’t paid off by the end of the month.

A 2.25% year-to-date rate increase means that for a cardholder making the minimum payment on a $5,000 credit card balance, it will take an additional five months and $868 in interest to pay the card off completely, according to calculations provided by Bankrate.com.

2. Car loans

Auto loan lenders use the Fed’s benchmark rate to determine the interest rate you’ll pay on financing. This won’t affect borrowers already locked into fixed-rate financing, but new car loans or those with variable-rate financing will likely go up in cost.    

A 2.25% year-to-date rate increase means that for a $35,000, 5-year new car loan, the monthly payment would be $36 higher now compared to a loan taken out at the beginning of the year, per calculations provided by Bankrate.com.

3. Adjustable-rate mortgages

4. Private student loans

Borrowers with federal student loans will be unaffected by the rate hike as interest rates for these loans are set by Congress, based on 10-year Treasury note yields. Plus, there is a payment and interest freeze on federal student loans still in effect through Aug. 31, which might be extended even further.

However, borrowers with private, variable-rate student loans could see an increase in how much they pay in interest charges, usually within a month of the rate hike. This would also apply to new borrowers signing up for private, fixed-term student loans after the rate hike kicks in. The rates for these types of loans tend to rise with the federal funds rate — though technically, they aren’t directly linked.

Interest rates and terms on private student loans can vary depending on your financial situation, credit history and the lender you choose.

5. Other variable-rate loans