APR and Interest rates have been on the rise and show no sign of slowing down. Higher interest rates increase the cost of borrowing money, making personal loans and credit cards less accessible to many people. While it’s challenging to predict what interest rates will look like a year from now, some signs point to an upward trend.
What is an interest rate, and why should you care?
If you ever need to borrow money to pay for a car, home, or other large purchases, you want to pay attention to interest rates. An interest rate is what a lender charges you to borrow money and is portrayed as a percentage of the loan’s principal balance. Interest rates and APRs are often lumped together, but they are slightly different.
While an interest rate is strictly an amount charged on the principal loan amount, APR includes the interest rate and fees charged by the lender. Your interest rate is determined by your credit score, payment history, and income. A low-risk borrower will pay a lower interest rate, while a risky borrower will pay a higher interest rate.
What’s causing interest rates to go up?
Many factors impact interest rates, such as the state of the economy, inflation, and the monetary policy of The Federal Reserve. When inflation rises, The Federal Reserve implements measures that eventually lead to higher interest rates. They do this in an effort to control inflation and keep it from getting worse.
While it’s impossible to predict what interest rates will look like in a year, the signs (high inflation and aggressive monetary policy of The Federal Reserve) indicate that rates will continue to rise. The Federal Reserve must take steps to keep inflation under control, but the consequence of that is higher interest rates and costs of borrowing.
Is it still worth it to refinance?
In a high-interest rate environment, it’s challenging to know whether refinancing a loan makes sense. The more interest rates inch up, the less likely you will benefit from refinancing. Whether you should refinance a loan depends on your current interest rate and financial situation. A good guideline is that you should refinance if you can save 1-2% by doing so. Even if refinancing doesn’t lower your rate much, it might still be worth it to free up needed cash.
Now may be a good time for a cash-out refinance since home and auto prices are rising and interest rates are still relatively low. Depending on your situation, accessing your equity by refinancing might be worth it.
The bottom line
It’s too soon to say if interest rates will continue to rise in 2023, but things seem to be moving in an upward direction. If you’ve been considering taking out a personal loan or refinancing an existing loan, now might be a good time in case rates are even higher this time next year.