How Much Will the Fed’s Near-Zero Rates Actually Help Borrowers?

ByNadav ShemerDec. 31, 2020
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How Much Will the Fed’s Near-Zero Rates Actually Help Borrowers?
Here is proof that even the darkest clouds have a silver lining. As humanity faces its greatest challenge this century, one small upshot is that borrowing costs will fall.

That’s because of the Federal Reserve’s two emergency rate cuts in March. On March 3, the Fed cut its benchmark rate by half a basis point (0.5%) to 1.25%. And on March 15, it slashed the rate a full point to 0.25%, bringing near-zero rates into place for the first time since the 2008 financial crisis.

Since then, several Fed representatives have voiced their uncompromising promise not to raise rates for the foreseeable future.

Here’s how the Fed’s near-zero rate decision could help borrowers in five different lending products.

Personal Loans

There’s a reason personal loans have become so popular among consumers in recent years. After trending at 12-20% for most of modern history, the average rate for a two-year personal loan has stayed close to 10% since the 2008 financial crisis. Personal loans hit an all-time low of 9.45% in November 2016. This date is notable because it is also when the Fed started pulling back from the near-zero rates it introduced after the financial crisis.

Now that the Fed has re-introduced near-zero rates, we should see personal loan rates fall to or below the previous all-time low. The average personal loan rate stood at 10.21% in November 2019, the most recent date for which data is available. Given the Fed’s benchmark rate is now 1.5% lower, average personal loan rates could fall to as low as around 9%.

Personal loans are highly customizable products, so finding the right one for you is easy with our tailor-made solution.

Should you get a personal loan now? Like home buyers, anyone in the market for a personal loan faces a win-win situation. Apply for a personal loan now and you should find yourself a good deal. Wait a while and you could potentially save 1-1.5% on your personal loan. For reference, with a 3-year, $10,000 personal loan, a 1% rate discount would save you around $5 per month and $169 overall.

Debt Consolidation

A debt consolidation loan is like any other personal loan, except it’s used for consolidating credit card debts. Let’s say you owe money on three credit cards: a debt consolidation loan replaces your three separate monthly payments with a single payment at a lower interest rate.

The Fed’s near-zero decision won’t affect other types of debt consolidation loans. However, if you find yourself unable to pay off all your debts, the current economic crisis could give you bargaining power. In theory your creditors could sue you for the amount, but it’s usually easier for them to just accept partial repayment. Given the forecasts of an oncoming recession, creditors may become more willing to cut their losses and accept partial repayment. One word of warning: debt resolution should only be considered as a last resort because of the damage to your credit score. 

Should you get a debt consolidation loan now? A debt consolidation loan is a personal loan by another name. Therefore, the same answer applies as above: rates are currently low but will probably go even lower.

Taking advantage of the silver lining

Given the chaos in the world right now, nobody can predict for certain where borrowing rates will go from here. But one thing we can be confident about is that the near-zero Fed rates will keep rates low for now. In all likelihood, loan rates will go down before they go back up.