Debt Reduction Advice | Debt Reduction Advice

For the past 18 months, the headlines have been calling interest rates “historically low” and on the whole they have been. Many people think of interest rates as a static measure of the cost of obtaining financing and the truth is that interest rates are fluctuating all the time. The Fed sets an interest rate called the Fed Funds Rate and many other associated rates in the finance world move in tandem with the Fed Funds rate.

Low interest rates are helpful for some and hurtful for others. It’s impossible to think of low interest rates as a purely good or bad thing because their impact varies depending on the perspective of the various parties affected by them. Consider how the following are impacted by low interest rates.

For Savers: The group most negatively impacted by low interest rates is the savers and people are saving money at a rate higher than they have in years. The savings rate is currently 3 times higher than it was a year ago and economist expect that it could more than double again in the next year as people work to refill the savings and emergency funds that they have emptied. Walk into your local bank branch and ask them what kind of an interest rate you can get in their high yield savings account or on a one year CD and you’ll get an idea of just how low rates are.

For Consumers: There are pros and cons to low interest rates for consumers. An advantage is that consumer financing is as cheap as it’s ever been. If you’re able to qualify for a loan, the interest rate tied to that loan should be low compared to other periods of time. The major disadvantage for consumers is that millions of people depend on interest as part of their income every year. Even though people are saving at a much higher rate than they did in 2007, interest income for 2009 is estimated to be $40 billion less overall. Over the past three months, income from interest has fallen an average of nearly 7.5% every month.

For Businesses: Low interest rates are generally good for businesses because they have access to inexpensive cash. A major cost of borrowing for a business is the interest expense and rates are being kept low to make it as easy as possible for businesses to finance their operations until consumers return and begin to spend again.

For The Economy: The reason the Fed is keeping rates low is that low interest rates are a stimulant to the economy. With low rates, businesses and consumers can get the financing they need. The government is borrowing literally trillions of dollars and right now the government debt being issued has incredibly low interest rates attached. The three month Treasury bill recently had a yield for bondholders of 0.02%. The government is essentially borrowing money interest-free in this environment. Finally, low interest rates are keeping mortgage rates down which should help to support the housing market because the purchasing power of borrowers is greater with less money from each monthly payment devoted to interest.