What higher interest rates mean for consumers

September 17 05:55 2015

As the U.S. Federal Reserve convenes Wednesday and Thursday  for a crucial policy meeting, everyone has been wondering whether the central bank will finally begin the process of raising key interest rates. But many consumers are asking themselves a much more fundamental question: Why do interest rates matter, and what would a rate increase mean for the typical family?Federal Reserve Building

Even if we see higher interest rates, responsible borrowers still will probably have easy access to loans and rock-bottom rates, said Louis Navellier, chairman of money management firm Navellier & Associates in Reno.  Banks will likely demand higher interest payments from less-qualified consumers, he said, but still court good customers aggressively. “Technically, a rate increase will widen the wealth gap a bit,” Navellier said, as lower-income families see more of their budget dedicated to interest payments for auto loans and credit card debt. This is particularly true, he adds, for variable-rate debts, such as adjustable-rate mortgages, which tend to be attractive to less-affluent borrowers because of lower initial payments.

However, given the “immense political pressure” around the issue of stagnant wages and income inequality, he adds, it’s highly unlikely policymakers will allow any significant increase in rates and borrowing costs over the coming months. Similarly, it’s also worth remembering that while lower interest payments are always a plus, we shouldn’t expect a big change in borrowing habits after a rate increase, said Whitney Fite, president of Atlanta-based Angel Oak Home Loans.

Even with a modest bump in the coming months, Fite said, auto and home loans will remain very accessible. “From a consumer standpoint, even after a potential rate hike, rates will remain at historically low levels,” he said. “Borrowers need to realize that mortgage rates moving from the 3s to 4s is not the end of the world, and that the affordability index remains very high.”