The Federal Reserve took a less aggressive approach to combating inflation on Wednesday with a smaller interest-rate increase. The 0.25% increase may not have as much of an impact on consumer finances as the larger hikes in the past six months, but it still means higher costs for home and car purchases, and carrying credit card debt. Despite the decline in inflation, the current high rates and prices still require individuals to adjust their financial plans to accommodate this economic environment, according to Nina O’Neal, a partner and investment advisor at AIM Advisors.
It was stated by Nina O’Neal, a partner and investment advisor with AIM Advisors, that the worst of interest-rate hikes was likely over, but that people still may not want to make big purchases such as a house or a new car. She also mentioned that with many economists and executives predicting a recession this year, people should consider ways to increase their savings.
Here is what you can try:
Consider revising the timeline for obtaining car loans and mortgages
It was stated by Charlotte Geletka, a certified financial planner with Silver Penny Financial in Atlanta, that the cost of borrowing money would not decrease soon as a result of the interest rate increase. She advised consumers who had been waiting for prices to drop and rates to return to their 2021 levels to adjust their expectations and reconsider their plans.
According to her, a small increase in the interest rate would not cause a significant change. The average interest rate for a 60-month auto loan on a new car was reported to be 6.18% as of the week of January 26, 2023, which was an increase from 5.69% in November 2022, as reported by Bankrate.
Consider factors beyond just the monthly payment
Ms. Geletka suggested that some individuals might be tempted to opt for a longer-term loan in order to reduce their monthly payments due to the increase in the cost of borrowing money. However, doing so would result in paying more in interest over time, particularly in the current high-interest rate environment.
It is advised to perform calculations in advance, as paying more in interest would leave less cash overtime to meet other expenses, leading to further dependence on credit cards to make ends meet.
Ms. Geletka stressed the importance of examining the full picture, including the interest over the entire loan period, and the true cost of borrowing, to avoid getting caught in a cycle of borrowing.