It’s been several weeks since the Federal Reserve Board met and cut the federal funds rate for the first time in over four years — and it’s expected to do it again soon, if economists are to be believed.
All of this rate-cutting is a huge bummer for anyone who has been reaping the benefits of high interest rates from ultra-safe investment vehicles like certificates of deposit or high-yield savings accounts, but it’s not all bad.
After all, the Fed never drops rates all at once, and instead edges them downward relatively slowly, so the chance that you may be able to balance both decent investment returns with lower interest rates is possible. But we’re here to talk about how rate cuts can save you money right now.
How does the federal interest rate cut help put more money in your pocket?
Like everyone else, you’ve probably been struggling with inflation well overtaking income over the last five years, and may have even gone to great lengths to save money. You can take advantage of cash back apps like the ones on this list, or clip coupons, buy in bulk, and try to not spend more than you have to in order to stay afloat.
But as the federal funds rate drops, other interest rates tend to follow. It may take a little longer for banks to respond by lowering their commercial loan rates, but you can reasonably expect they will fall.
How can you save money with lower interest rates?
If you have only fixed-interest loans, the change in interest rates won’t affect you automatically. Common products with fixed interest include mortgages, car loans, and personal loans.
However, if you have variable-interest loans, like credit cards or credit lines, the odds are that the wheels are already in motion for those rates to begin to drop. For example, the last time rates dropped from where they’ve been was in July 2007, when they fell from 5.26% to 5.02%, and continued falling. By November 2007, they were at 4.49%.
Now, I’m not saying that exact situation is going to happen now, but let’s look at what effect the past drop had on variable-interest credit rates. In August 2007, the average credit card rate was 15.24%, when the federal funds rate was 5.02%. In November 2007, the average credit card rate was 14.38%, when the federal funds rate was 4.49%.
They don’t fall together perfectly, but they do fall.
Ways to save money with lower interest rates
Variable-interest loans automatically adjust their rate as time goes by, but you can put more money back into your pocket when these federal interest rate cuts happen in other ways, too. Here are the biggest ones to consider.
1. Refinance your mortgage
Refinancing your mortgage can save you tens of thousands of dollars in interest over time — if not more — if timed correctly. You’ll have to do the math for your own situation, but anyone who bought a home in the fall of 2023, for example, may be able to cut their interest rates as much as a full percentage point right now, since the average 30-year fixed-rate mortgage peaked at 7.79% in October 2023, and is at 6.54% as of Oct. 29, 2024.
2. Get a new car loan
Did you buy your car when rates were higher and now your payment is killing you? Now is the time to refinance. Check with your lender to see what’s possible in your situation. Refinancing your loan may be able to put a lot of money back in your pocket as interest rates fall.
3. Take out a personal loan
With rates trending downward, another great option for tackling high fixed-interest-rate loans is to simply take out a fixed-interest personal loan to pay them off. Whether it’s an older personal loan that’s at a higher rate, an auto loan that can’t be refinanced, or even a variable-rate product like a credit card, you may be able to save a ton of money by moving your debt into a cheaper fixed-rate product.
Click here for our list of the best personal loans — can one of them help you consolidate your higher-interest debt?
Beat inflation with lower interest rate loans
If you’ve been using our recommended budgeting apps and you’re still having trouble making ends meet, a reduction in overall interest rates may be just what you need. This federal interest rate cut should allow you to refinance your higher cost debt into cheaper debt, which is easier to pay off more quickly and accumulates less interest over time.