Investments

How To Take Advantage Of Low-Interest Rates

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 8 minute read

The economic impact of the COVID-19 epidemic has resulted in near-historically low-interest rates since whole industries have ground to a halt. For the foreseeable future, economists and policymakers anticipate that interest rates will stay historically low.

How can you best position yourself to benefit from the likelihood that interest rates will remain low for an extended period of time?

To begin with, the cost of borrowing money is reduced when interest rates are low. This means that if you can comfortably manage the monthly payments and other continuing costs of ownership, now is a good time to explore financing significant purchases.

Refinancing existing debt, which was likely incurred while interest rates were higher, becomes more attractive as a result of low-interest rates. Borrowing expenses for a long-term loan can be reduced significantly during its lifespan by refinancing while interest rates are low.

While there is good news associated with low-interest rates, there is also terrible news. If interest rates decline, the rewards on savings and cash management accounts will decrease.

This encourages savers and investors to take more chances in hopes of higher returns, even though there are still plenty of safe, lower-risk options available to them in the current market, such as buying shares of low-cost, fixed-rate bonds through Worthy Bonds or purchasing works of art through Masterworks.

You may take advantage of low-interest rates without succumbing to their pitfalls by employing any number of other tactics. Let’s investigate many of them in detail.

Existing Debt Refinance

There is a dramatic increase in requests to refinance debt when interest rates are low. That makes sense since the total amount of interest paid on a loan will be less if the interest rate is lower (assuming all other factors remain constant).

Mortgages, automobile loans, and student loans are frequently refinanced since they represent the largest debts that consumers typically owe.

  • Do a mortgage refinancing. As loan amounts increase, cost savings accrue. By switching from a $150,000 mortgage with a 7% APR and 20 years left on the term to a $150,000 loan with a 4% APR and 20 years left on the term (if available), you may save more than $50,000 in interest payments alone by refinancing. Not included in that are closing expenses, which can surpass 5% of the amount being refinanced.
  • Still, you may certainly make a profit on the sale if you have more than five years left on your mortgage and your current rate is at least two percentage points higher than your expected refinancing rate. Credible and similar services can ease the burden of comparison searching for borrowers who decide that refinancing is a good idea. In a matter of minutes, they will supply you with quotes from a wide range of financial institutions.
  • Pay Off Your Car Loan Early by Refinancing it. All of the same reasoning holds true here. Auto refinancing often results in a smaller savings amount than mortgage refinancing, but it also has significantly cheaper closing expenses. If your credit has significantly improved since you bought your automobile or if you financed the purchase through the dealership, it’s definitely worth looking into (which tends to be more expensive than bank or credit union financing).
  • Think about getting a refinance on your student loans. It’s more complicated to refinance student loans since doing so means giving up privileges like 10-year loan forgiveness for qualified public officials. If you’re prepared to give up a little bit of comfort in return for a smaller regular payment, then by all means. Those who refinance their student loans with Credible might receive up to a $750 incentive.

Begin or Speed Up Your Home Search

Finding a place to live during the biggest economic crisis since the Great Depression is easier said than done. You are perfectly within your rights to delay house hunting until the outlook improves if your financial situation has worsened as a result of the epidemic or you feel significantly less secure in your livelihood than before.

But if you’re ready to make what may be the greatest investment of your life, the present low-rate environment supports diving in with both feet. Purchase loan rates are also close to or at multi-year lows, much like refinancing rates.

Indeed, borrowing costs are extremely sensitive to even tiny fluctuations in interest rates. A reduction from 5% to 4% on a 30-year fixed-rate loan to finance a $200,000 purchase saves approximately $43,000 in interest and decreases the monthly payment by around $120, or more than 10%.

Don’t waste your time with adjustable-rate loan alternatives at these low-interest rates. You’ll be able to lock in a very low rate for a few years, but if benchmarks rise during that time, your rate will shoot up once the fixed-rate phase finishes.

Purchase a New or Used Vehicle

When your automobile reaches a certain age, it may be time to upgrade to something newer or to look into purchasing a used car. Auto loans, being collateralized by the vehicle’s worth, have historically had lower interest rates than other forms of credit, such as credit cards and personal loans, because of the lower risk involved.

MyAutoloan’s vehicle loans are a steal in the present low-rate climate, with typical APRs well below 3% for qualifying purchasers. Car dealers and manufacturers need to make sales badly because falling demand and social distance policies have ruined the in-person purchase experience. Sometimes, buying from a dealer is a safer option than selling to a private person, and this may be one of those situations.

Credit Card Balance Transfer

Even in the greatest of economic circumstances, carrying a balance on a high-interest credit card may be a significant financial burden. It just takes one loss or reduction in income to threaten our ability to pay bills or buy groceries during tough economic times.

If you have good credit, you may be able to take advantage of a balance-transfer offer with little or no interest and use it to get your credit card debt under control. Issuers are more selective during recessions when it comes to issuing new credit cards, but they seldom stop allowing balance transfers altogether.

This is due in part to the fact that many cards fail to pay off transferred amounts before promotions finish, making them responsible for accumulated interest as well as the charge (usually 3% to 5% of the transferred amount).

That’s right, even if cardholders take advantage of 0% APR debt transfer offers, credit card issuers still make money.

Yours shouldn’t be that way. Find a debt transfer credit card that offers a lengthy 0% APR deal, and make sure you know how to use your card properly. The Citi Double Cash Card is well-liked since it offers a promotional APR of 0% for 18 months and 2% cash back on purchases made in a timely manner.

Increase Your Savings

A new online savings account may be opened in ten minutes or less with no impact on your credit score. There’s no use in putting things off any longer if your existing savings account isn’t providing adequate interest.

Examine our top-rated high-yield savings accounts to locate a convenient online financial institution. Put your money in a high-yield CD if you don’t mind leaving it there for a year or more.

Keep in mind that certificates of deposit (CDs) typically do not allow penalty-free early withdrawals, unlike savings accounts; this means that you must wait out the CD’s entire term unless you are willing to forgo a sizable portion of the income you have accrued.

Look for Savings Account Alternatives

In the banking industry, the safest place for your money is in an account at a bank that is a member of the Federal Deposit Insurance Corporation (FDIC). As of today, no depositor has lost more than $250,000 per customer, per bank that is protected by the FDIC (a number that has been stable for over a decade).

Because the FDIC doesn’t back fixed-rate accounts and instruments kept outside of FDIC-member institutions, they carry more inherent risk than bank savings accounts. In contrast to conventional savings accounts, however, they typically provide substantially larger returns. In slow-paced settings, the contrast becomes more pronounced.

Peer-to-peer (P2P) lending and fixed-income bonds are two options worth looking into. Worthy Bonds, a bond option with a cheap minimum investment of only $10 and a respectable rate of return of 5%, is a good choice. When it comes to peer-to-peer lending, both Prosper and LendingClub have been around for quite some time and provided solid returns, albeit not always in a regular fashion.

Spend Money on Home Improvement Projects

Many common renovations can lower the value of your house. Steer clear of them under all circumstances. However, there are some renovations and energy-efficient enhancements that not only cover their initial expenditures but also increase the home’s resale value.

Take advantage of current low-interest rates to obtain affordable financing that may be repaid over a period of years if you are unable to pay for the outright cost of such a project or projects in cash.

Getting a home equity line of credit is the best way to finance home renovations. Most lenders want a minimum equity stake of 15% before they will grant money for a big home renovation project like a kitchen or bathroom makeover. 

However, the actual sum is determined by your home’s evaluated value: For a home purchased for $250,000, a 10% gain in equity is worth $25,000. For a home purchased for $500,000, the growth in equity is worth $50,000.

If you don’t have enough equity in your house, you may want to look into a personal loan instead. In comparison to home equity lines of credit, personal loans often have higher interest rates and shorter repayment periods.

Stop Contributing Extra Principal to Low-Interest Loan Balances

Recently, I stopped making a predetermined amount of extra principal payments each month. Not because I lacked the means to do so, albeit the extra money was appreciated with the arrival of a new member of the family.

However, after doing the math, I realized that if I invested that $100 per month into a diversified stocks portfolio, I would likely make more than the entire interest paid on a 4% APR house loan for the remaining 25 years of the mortgage.

Do not wait as long as I did if you are not totally against taking on debt. The same reasoning may be used for any loan with a low-interest rate, often around 5% but potentially up to 7% or 8% depending on your expectations for the real long-term return on invested money (which is open to debate).

When looking at returns on investments lasting more than a decade, the stock market has historically averaged around 10% annually. But inflation cuts into this rate, and other factors, such as market timing, also play a role.

Bottom Line

Recently, I stopped making a predetermined amount of extra principal payments each month. Not because I lacked the means to do so, albeit the extra money was appreciated with the arrival of a new member of the family.

However, after doing the math, I realized that if I invested that $100 per month into a diversified stocks portfolio, I would likely make more than the entire interest paid on a 4% APR house loan for the remaining 25 years of the mortgage.

Do not wait as long as I did if you are not totally against taking on debt. The same reasoning may be used for any loan with a low-interest rate, often around 5% but potentially up to 7% or 8% depending on your expectations for the real long-term return on invested money (which is open to debate).

When looking at returns on investments lasting more than a decade, the stock market has historically averaged around 10% annually. But inflation cuts into this rate, and other factors, such as market timing, also play a role.

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