- Low interest rates impact finances in different ways: good for borrowers, tough on savers and income investors.
- Ways to take advantage of low interest rates include refinancing loans, selling bonds, and buying property.
- CDs, corporate bonds, and REITs offer the best investment income options when interest rates are low.
- Visit Business Insider’s Investing Reference library for more stories.
Interest rates have been at historic lows for years…and they just keep falling. In the US, the federal funds rate – the benchmark on which other rates are based – is near 0% in 2021, and the Federal Reserve has declared that it plans to keep it there until at least 2023.
Why are interest rates so low? The Fed adjusts interest rates as part of its mandate to oversee the nation’s money supply, the amount of cash and easily obtainable funds circulating throughout the US. Reducing interest rates is part of what’s called an expansionary monetary policy, and the Fed does it to combat economic slowdowns or recessions, which mean business cutbacks and closures, and job losses.
The theory is that low interest rates stimulate the economy, encouraging companies and consumers to borrow, spend, and expand. For example, in the wake of the Great Recession, the Fed lowered the federal funds rate in 2008, and it stayed near zero until 2015.
The Fed is currently depressing interest rates to keep the economy pumping despite the dragging effect of the ongoing COVID-19 pandemic.
But what do low interest rates mean for your personal balance sheet – your investments, savings, and debts? The answer is mixed: Favorable in some ways, unfavorable in others. But overall, you can take action to take advantage of the situation.
Here’s what you need to know to make the most of low interest rates.
How do low interest rates impact your finances?
For bank account-holders, bad news: Falling interest rates typically mean lower returns on their savings. Whether the money is stashed in a savings account, a checking account, or a money market account, the interest earned on it will decrease.
Borrowers, on the other hand, might get some relief. Folks who are paying off debt whose interest fluctuates, such as a credit card balance or a variable-rate loan, will likely see a decrease in their annual percentage rate (APR). It won’t affect their overall balance – the amount they owe – but it will result in smaller interest charges.
Consumers who are in the market to finance a major purchase, such as a car or home, will have access to loans with more favorable rates.
As for investors, it depends on what they’re invested in. Broadly speaking, though, low interest rates are good for people who have money in the stock market. When interest rates are low, consumers have more money to spend and banks are lending more. Companies generate more revenue and are able to take out loans that can help them expand – which can cause their stock share prices to rise.
How to benefit from low interest rates
There are several key moves you to make when interest rates are low or falling – to take advantage of “money being cheaper,” as the financial pros like to say.
Low interest rates strategies for borrowers
- Refinance your loans: If you have a mortgage or student loans, consider refinancing- that is, paying off your old loan by taking out a new one. This new one will have a lower interest rate, of course; ideally, it should also be a fixed-rate loan, to lock in that lower rate. You’ll need to have good credit to qualify, but if you do, you stand to save a lot of money on interest fees.
- Consolidate your debt: If you’re juggling multiple credit card balances or personal loans, taking out a debt consolidation loan can help you get all your liabilities under control. Debt consolidation loans by combining them into one big debt – and one monthly payment. This might make repayments more manageable, particularly if you can take advantage of a lower interest rate.
- Transfer credit card debt: Use low interest rates as an opportunity to pay off your credit card debt faster by doing a balance transfer to a credit card with a lower interest rate. You can consider a low interest credit card with a favorable ongoing interest rate or a balance transfer credit card. The latter typically offer a 0% introductory APR on balance transfers for anywhere from 12 to 21 months, so you only want to go with that option if you can pay off your balance fairly quickly – or at least, within that time frame.
Low interest rates strategies for investors
- Buy property: If you’ve been thinking about buying a home, there’s no better time to take out a home loan than when interest rates are at historic lows. Even if you already have a house, you might want to consider investing in a second home or other property if you can lock in a good mortgage rate.
- Use the interest savings: If you’ve got a mortgage or a car loan whose interest rate has gotten extremely low, don’t pay it off. Instead, put the extra “income” – the difference in the interest amount you’re charged on your loan – into investments. You could boost the amount you contribute to your 401(k) plan, for example.
- Sell bonds: Bond prices tend to go up when interest rates are low. If newly issued bonds are paying lower interest, older bonds with higher yields become more desirable. So, if you don’t need the income from your bonds, seize the chance to sell them at a profit, or “above par” as the investment pros say.
What should you invest in when interest rates are low?
Income-oriented investors will probably find that a low-rate environment isn’t ideal, particularly if they are seeking fixed-income or fixed-interest investments. However, there are still some options when interest rates tumble. Among the better ones:
- High-yield savings accounts: When interest rates plummet, a high-yield savings account will at least offer better returns than what you’ll get with a basic savings account at most traditional banks.
- Certificates of deposit (CDs): If you can snag a decent rate before interest rates hit rock bottom, locking it in with a CD will help your savings maintain their value against inflation. Just keep in mind that CDs tie up your funds for a certain amount of time – the higher the interest rate, the longer the period, generally – and withdrawing your money early usually results in a penalty.
- Corporate bonds and municipal bonds: Bonds appeal to fixed-income investors because of their low volatility, and they tend to offer better yields than savings accounts and CDs. Corporate bonds – debt issued by companies – pay more interest than US government bonds (called Treasuries), admittedly at slightly higher risk, though they’re still relatively safe. Municipal bonds, which are issued by cities, counties, and states, also offer higher yields as well as some tax advantages: The interest they pay isn’t subject to federal or state taxes.
- Real estate investment trusts (REITs): When interest rates are on the decline, REITs – publicly traded funds that own and operate commercial properties – can prove a smart investment. Low interest rates benefit real estate. If REITs borrow at lower interest rates, they can expand construction, take on more projects, refinance their current loans – all of which improves their performance, and the earnings they share with investors.
The financial takeaway
Low interest rates might not be great for savers, but they’re great for anyone paying off debt. They can also be beneficial if you’re looking to borrow, especially for major purchases like buying a house.
As for investors, it’s a mixed bag. Interest rates near zero might not be ideal for those dependent on investment income, especially if they want low-risk vehicles that pay a steady return. But there are still plenty of ways to invest in a low-rate environment that can help you at least maintain your wealth. And some investments, such as real estate and bonds, might post better returns, or be sold for a profit.