With recent federal interest rate hikes and inflation at a 40-year high, many fear the financial impact of the changing market. But, when it comes to loans, rising interest rates — which have still managed to return to pre-pandemic levels — will be a bigger factor for some more than others. Here’s what you need to know about interest rates today and how they might impact your senior care loan.
What is an interest rate?
An interest rate is an amount a lender charges a borrower based on a percentage of the principal, which is the loaned dollar amount. In September 2022, the Federal Reserve raised interest rates by 0.75 of a percentage point to lower prices and counteract inflation, which meant borrowing money became more expensive. As of November 3, 2022, interest paid on reserve balances has increased to 3.9%, with the new target range being 3.75% and 4%. For a borrower, banks generally add 3% to their prime rate — or the best rate offered to most borrowers — on top of the federal interest rate.
Interest rates are set mostly by central banks that intervene in the open market to maintain a target rate. Through open market operations (OMO), central banks will buy and sell Treasury securities to influence short-term interest rates as needed.
Generally, the free market’s supply and demand for loans and credit significantly impact interest rates. The way people choose to spend their money helps dictate the market. These choices also influence how the Federal Open Market Committee (FOMC) — consisting of seven governors of the Federal Reserve Board and five Federal Reserve Bank presidents — determines the near-term interest rates and monetary policy.
How today’s rates may impact your current loan
While federal interest rates will increase for new loans, rates for some existing loans will remain unchanged. Those with fixed-rate loans — most personal loans — will see that payments are unaffected by any change in the market throughout the entire length of their loan term.
However, variable-rate personal loans are impacted by the higher interest rates, increasing the rate on your loan as the federal rate increases. In this case, take a closer look at your loan terms and see if combining debts into a single payment with a fixed-rate debt consolidation loan may make more financial sense.
Bridge loans — short-term loans used until a borrower either sells real estate or obtains permanent financing — are not subject to the same regulations as banks. They are generally used for a short period, ranging from six months to a year or longer, and may come with a higher interest rate from the start. Although a typical bridge loan interest rate may be slightly higher than that of a conventional mortgage, the rates are usually set on a case-by-case basis rather than being set by government regulations. The ability to set a borrower’s interest rate this way is because bridge loans are known as hard money loans instead of conventional loans.
How interest rates may impact you if you’re looking for a loan
Those looking for new loans will notice the impact of the rising interest rates. But, there are strategic ways to minimize the effect on your finances.
Taking out a personal loan as soon as possible to lock in the current rates will help to avoid any additional federal interest rate hikes. You can also take out a debt consolidation loan (depending on your credit) or a fixed-rate loan, which won’t be subject to the changing market because the interest rate is fixed and will not increase with rising interest rates.
Additionally, you can reduce the length of your payment term so you are paying for a shorter period, therefore incurring less interest overall. Many lenders are willing to offer lower interest rates for those with shortened terms, as they can recoup their money faster.
How to secure a loan to pay for senior care
Securing a loan to fund senior care requires the right lender and loan. Your situation can determine the kind of loan you get, be it a fixed-rate personal loan to pay for a significant home accessibility modification or a bridge loan to help you move into a senior living facility while selling your home.
For the best interest rate on your loan, you should maintain a “very good” credit score — above 740. Although not required, having a letter of recommendation from an employer or holding a job can be helpful, too, as it demonstrates an income source and shows you are a lower-risk lendee.
You’ll also need to show your current income to verify you have funds for repayment. If you’re applying for a bridge loan, which allows for up to six people as co-borrowers, only one person needs to meet these qualifications to obtain a better rate.
