The superstar interest rates seen in the 1980s and early ’90s on long-term savings products are almost unbelievable compared to interest rates today.
The Federal Reserve has said that the lows of current interest rates are meant to encourage spending among tightfisted Americans hoping to save every penny they’ve earned, but many depositors likely feel like they’re being punished. Luckily, if you feel the same way, there are some positive financial moves you can make while interest rates are low.
Why Interest Rates Today Are Low
In a 2012 luncheon for the Economic Club of Indiana, then-Fed Chairman Ben Bernanke explained how low interest rates benefit the country’s economic recovery:
“The way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time. If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else.”
Interest rates today are expected to settle at near zero through 2015, giving savers and borrowers alike ample time to devise a strategy that works the continued interest rate decreases to their advantage.
How to Take Advantage of Current Interest Rates
No matter what side of the line you fall on — whether you’re more interested in squirreling money away or borrowing some in the near future — a few beneficial money moves still exist to help you come out on top while current interest rates are low.
1. Refinance Your Car Loan
If you locked into an auto loan rate that is higher than you’d like, refinancing can be a great way to take advantage of low interest rates today. There are fees associated with an auto loan refinance, such as lien-holder and state re-registration fees, according to Cars.com, but the savings possible from obtaining a lower interest rate are vastly more than the $50-$75 you might pay for processing.
The time necessary to refinance an auto loan is about one hour or less, which is practically no time when it means saving thousands in out-of-pocket interest charges.
2. Take Advantage of Home Refinance Rates
There’s no better time to trade in the high mortgage interest rate you signed up for when financing your home for today’s budget-friendly rates. The same is true of securing a home equity line of credit (HELOC), which is essentially a second mortgage that gives you a line of credit (using your home as collateral) to draw upon for significant expenses at a low interest rate.
3. Shop for High-Yield Savings Accounts
Big banks don’t have an edge when it comes to deposit account rates, since their primary focus is to sell you on consumer loans. Instead, now is the time to turn to a high-yield savings account from an online bank. These web-based financial institutions provide customers with the benefit of higher-than-average savings account rates, and can do so because they don’t have the same overhead costs as a traditional brick-and-mortar bank.
4. Find No-Penalty Certificates of Deposit
Certificate of deposit (CD) rates are far from ideal, with the national average CD rate for a 2-year CD term at a measly 0.47% APY. However, for those who still find value in the certificate of deposit product, choosing a no-penalty CD over conventional certificates can eliminate the threat of losing earnings should a more financially prudent savings option surface during the CD’s term.
5. Invest in the Stock Market
Savers who are all-out frustrated with low interest rates today and are not adverse to risk can elect to invest in high-yield dividend stocks. While returns of 8 percent or higher sound enticing, Motley Fool contributor Rich Smith warns that “such returns are not guaranteed, so this is for long-term money only.”
Smith also warned that investors who need access to their funds within five years or sooner should avoid investing in the stock market as an alternative to current interest rates on deposits. Those who are most concerned with a high return, and not liquidity, should incorporate some market risk for added gains to their savings.
With interest rates today low until 2015, adjusting your finances accordingly can successfully save you more money in the long run.