NerdWallet's Smart Money Podcast - Fed Up with High Rates? Here’s How a Cut Impacts Your Loans and Savings

Episode Date: September 18, 2024

Learn how the Fed’s interest rate cuts may affect your loans, savings, and investments, as well as what to do about refinancing. How could interest rate cuts affect credit card debt? Will it be easier or cheaper to get a mortgage or auto loan with interest rates going down? Is now a good time to refinance? Hosts Sean Pyles and Anna Helhoski break down how the Federal Reserve’s expected interest rate cuts could impact your finances. They discuss the potential impact on credit cards, mortgages, and savings accounts, as well as how these changes might influence borrowing and investing decisions. Then, Sean and Anna cover some of the top money headlines from the past week, including the latest inflation figures, household income trends, and new developments in student loan servicing following the Consumer Financial Protection Bureau’s lawsuit against Navient, formerly known as Sallie Mae.  Refinancing your student loans can save you thousands or lower your monthly payment. NerdWallet has a tool to help: https://www.nerdwallet.com/refinancing-student-loans  In their conversation, the Nerds discuss: interest rate cuts, Federal Reserve, mortgage rates, credit card debt, loan refinancing, auto loans, savings accounts, inflation trends, household income, student loans, personal loans, CD rates, adjustable-rate mortgages, refinancing, high-yield savings, financial planning, debt consolidation, interest rate changes, fed rate cut, mortgage refinancing, investment strategies, federal student loans, FAFSA, CFPB, inflation report, personal finance tips, money headlines, inflation rate, mortgage interest rates, loan interest rates, private student loans, car loan refinancing, variable interest rates, economic data, financial markets, personal debt, interest rate savings, cost of borrowing, and loan interest. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Hilhoski. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic and then leave you with the latest money headlines. Today, we're talking about what we've all been waiting for, interest rate cuts. That's right. The Federal Reserve is expected to cut interest rates, but what does that actually mean for you? In essence, it means you might catch a break if you want to get a mortgage, a new credit card, or an auto loan. But there's more to it than just

that, and Sean and I will dive into it. First, some context setting. Way back in March 2022, the Federal Open Markets Committee, we'll refer to it as the FOMC, started raising the federal funds rate in response to quickly growing inflation. Listeners, if you don't know the federal funds rate, it's the interest rate that US banks pay to one another to borrow or loan money overnight. The Fed rate affects interest rates on everyday consumer products like loans, and it's set by the FOMC. That's the monetary policymaking part of the Federal Reserve. So from March 2022 on, the FOMC hiked interest rates 11 times before stopping in July 2023. For the Fed's next eight meetings, it left interest rates paused at 5.25% to 5.5%.

But last month, Fed Chair Jerome Powell finally gave a clear sign that the Fed would be making a cut at its September meeting, which ends today. We'd like to note that the newly-slashed target interest rate would still be much higher than the near-zero rate that was set in early 2020. It's unlikely there will be too many immediate effects from such a small rate cut. There also tends to be a lag in Fed rate decisions and the rates you actually see out there in the wild. But it's still a big deal, and it likely signals several more rate cuts down the line that could have a bigger impact. So what happens next? Sean, let's break down what it means for different financial products

that listeners might be looking for. First off, credit cards. Now, interest rates on credit cards are variable, so they'll be adjusted pretty quickly after the Fed makes a cut. That means that credit card debt will cost a little less. And we mean only a little less. That's because credit card debt is already expensive. We asked credit cards writer and Smart Money co-host Sarah Rathner for an example of how a slightly lower credit card interest rate could play out. She says that if you have an average balance of $5,000 on a card that charges 25% APR, you'll end up paying $1,250 in interest over one year. If your interest rate is lowered one percentage point to 24% APR,

you'll pay $1,200. That's only a $50 savings. Moving on to mortgages. Last October, mortgage rates hit a more than 20-year high of 8% on a 30-year fixed rate loan. Since then, mortgage rates have been coming down. In August, the average rate on a 30-year fixed rate loan was 6.31%. And a quick note for listeners, you can always check nerdwallet.com for the latest rates. A quick way to do that is by searching NerdWallet current mortgage rates. We'll also add a link in today's show notes. Now we consulted Kate Wood, a home and mortgages writer at NerdWallet, who says a small Fed rate cut probably won't have a big impact on mortgage rates, to be honest. But homeowners with adjustable rate mortgages or home equity lines of credit

should see rate savings ASAP. And those who bought at higher rates in the last few years could benefit from refinancing. All in all, it's probably best to make your purchasing decisions based on when you're ready, not when interest rates are. Pay down your debt and build up your credit score and get yourself in the strongest position possible to get the best rates a lender offers. On to auto loans. I myself am holding on to my 10-year-old car for dear life because car prices and rates have been high in the last few years. NerdWild auto loans writer Shannon Bradley says that auto loan rates tend to follow the path of the Fed rate, but it can take time for rates to reflect what the Fed has said. Now, your car loan APR is set by several factors, including credit history, credit score, loan term, and how old the vehicle is. Better credit or a slightly used car would probably make a bigger difference to the interest rate you get than a small drop in the Fed rate. But when rates do come down, refinancing your auto loan could reduce the amount you have

to pay on a monthly basis. Shannon told us that lenders say refinancing is most beneficial if you can reduce your rate by 1% without extending the loan term. If you're planning on taking out a personal loan from a bank, credit union, or online lender to pay for a big purchase, you might see slightly lower rates from a Fed rate cut, but the rate you'll get is pretty much determined by your personal finances when you apply. Jackie Velling, a personal loans writer at NerdWallet, told us that if you want to use a personal loan to consolidate debt, it's best not to wait for an additional rate cut, especially if you have high interest credit card debt. For those who need to take out a student loan, a Fed rate cut will impact private student loans, but not federal student loans.

At least not yet. If you have a variable rate private student loan, your rate could dip slightly after a rate cut. Eliza Haverstock, NerdWallet's student loans writer, says for fixed rate loans, you might consider refinancing to get a lower rate. NerdBallet has a tool designed to help you refinance your student loans, which we'll link to in today's show notes. But like other types of loans, the rate you get really depends on what you can qualify for. Federal student loans have fixed interest rates and the government only sets rates once a year, in the spring before the upcoming school year. So what the Fed does between now and the next rate change could influence rates that are set for the 2025-2026 school year. So that's the skinny on loans. As always here at NerdWallet, we recommend shopping around to find the best rates

on any loans or credit cards. Let's turn to savings. The Fed rate increases since March 2022 were beneficial to savings rates. Today, many high-yield savings accounts have annual percentage yields, also known as APYs, above 5%. We asked Margaret Burnett, a consumer savings writer at NerdWallet, what happens to those high savings rates once the Fed starts making cuts. She said there will likely be a dip in the highest rates, so those accounts that were earning above 5% could top out around 4%. But 4% is still well above what large banks typically offer, which is next to nothing at

0.01% APY. Here's an example from Margaret. She says that if you deposit $1,000 in a typical savings account with an APY of 0.01%, it would earn 10 cents in interest over a year. With a high-yield savings account with an APY of 5%, you'd earn about $51. So similar to high-yield savings accounts, certificates of deposit, better known as CDs, had higher interest rates over the last few years than in the past decade, above 5% APY. Spencer Tierney, a consumer banking writer in NerdWallet, told us that a Fed rate cut means those big APYs have probably pe, a consumer banking writer at NerdWallet, told us that a Fed rate cut means those big APYs have probably peaked, and we're likely to see them gradually drop. So if you want a CD, now's the time to get them. There's still a good way to earn a steady interest without

the market risk. Speaking of the market, interest rate cuts will definitely impact stocks. Publicly traded companies borrow a lot of money and the cost of borrowing rests heavily on interest rates. Yeah, but some stocks might be more vulnerable to Fed rate fluctuations than others. Sam Taub, an investing writer at NerdWallet and frequent guest of the podcast, said tech stocks and small cap stocks are more dependent on borrowing to stay afloat, so lower rates can be beneficial. He also said that consumer discretionary stocks tend to make more money from consumer spending, so if rates are lower, people will be more likely to take out loans, which is good for those stocks. And Sam said that bank stocks could benefit from

a greater spread between the interest that they pay out to depositors and the interest they collect from borrowers, since the rates they pay could decrease faster than the rates they collect. So overall, lower interest rates are generally positive for the stock market, but there is one catch. The Fed is making rate cuts because recent economic data shows the economy is slowing down. A slower economy could make investors nervous, and that might provoke stock market sell-offs. Ana, we've touched on how the Fed cuts will impact each one of the greatest hits in personal finance, but what's the big picture when it comes to the economy? Yeah, the goal of raising interest rates and leaving them elevated was to slow down a burning hot economy that was leading to faster-than-sustainable price growth. Now that things

have cooled off, cuts are on the way. But in the words of NerdWallet economist Elizabeth Renter, when the Fed begins to cut rates, they'll be signaling they're done with tapping the brakes. However, they won't be punching the gas either. That's right. The Fed will still be watching economic data just as closely to determine how fast they'll cut rates. Like we said at the top, it's going to take time for the impact of those cuts to show up in personal finance products, and that extends the economy too. But over time, lower rates will lead to more borrowing for businesses and consumers, which could lead to increased economic activity. The goal is to get rates down to a reasonable level so the economy can grow in a steady and sustainable way.

Up next, a few money headlines from the last few days. Sean, obviously, we've been talking all about the Fed, and here's one indicator that they've been paying attention to among many. The Department of Labor reports that the latest measure of inflation hit a three-year low last month. Yeah, the Consumer Price Index, or CPI, rose 2.5% from August of last year and was down from a July figure of 2.9%. So-called core inflation, stripping out volatile food and energy prices, was up 3.2% year over year and rose 0.3% for the month, which was faster than the overall CPI. Speaking of those energy prices, here's one more measure of inflation, gas. Prices at the pump in August were down almost 12% from a year ago, according to the Energy Information Administration. The average price for a gallon of gas last month was $3.39. Anna, I know you have a car,

but you live in New York City, so this maybe doesn't affect you quite as much. But here in road trip country, it certainly makes a difference. So Anna, are you feeling richer? Oh, yeah, I have my Birkin bag right here. And I plan to bring it with me to the country club and my Ferrari Spyder this weekend. Just kidding. The answer is no, I'm not feeling richer. Well, maybe not Ferrari richer, but according to new data from the Census Bureau, household incomes in the U.S. rose 4% from 2022 to 2023, the first gain since the start of the pandemic. Yeah, the median household earned $80,610 in 2023, up from $77,540 in 2022.

And these figures account for inflation, which, as we know, spiked since the pandemic. Basically, factoring in inflation, that means buying power is about where it was in 2019. And one other item from the census report, 92% of the U.S. population had health insurance in 2023. That's about the same as the year before. It's probably fair to say that the student loan system has been one of this year's financial boogeymen. Yeah, starting with the absolute mess of a rollout for the new Free Application for Federal Student Aid, or FAFSA, paperwork. Some high school seniors had to make decisions about which college they'd go to without knowing their full student aid package. Right, and the Supreme Court continues to reject the

Biden administration's plans to ease student loan debt. And now the Consumer Financial Protection Bureau, or CFPB, has offered a legal settlement to one of the primary student loan servicers and is attempting to ban it from the federal student loan market. The company is Navient, formerly known as Sallie Mae, and the CFPB sued it back in 2017, accusing the company of illegally steering student loan borrowers into more expensive repayment plans. At the time, Navient was the largest student loan servicer in the country, managing more than $300 million worth of federal and private student loans. Under the settlement, Navient will completely exit the federal loan servicing business

and pay $120 million in fines and compensation for borrowers. The CFPB says it will automatically mail checks to eligible borrowers and warn people to be aware of scammers who might claim to be from the CFPB and say borrowers have to give them money in order to get settlement funds. Again, the agency says the process will be automatic and it will not require any information or documentation from affected borrowers. Don't fall for scams, people. That's it for this week's Money News. We always welcome your money questions and comments. Turn to the nerds and call us or text us on the nerd hotline at 901-730-6373. That's

901-730-NERD or send us a voice memo at podcast at nerdwallet.com. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes. Today's episode was produced by me and Tess Vigeland and edited by Rick VanderKneife. Here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.