When Will Dropping Interest Rates Finally Make My Life Easier?

Now that the Federal Reserve has cut the federal funds rate -- the rate at which banks borrow money from each other -- many of us may be thinking the same thing: How does this impact me? When will getting a mortgage or a car loan become less expensive? When can I expect to see the interest rates on my credit cards fall?

In other words, when will lower rates trickle down to make my life easier? Let's take a closer look.

It's sometimes a slow drip

As soon as the Fed announces a new federal funds rate, it goes into effect immediately. However, the time it takes to trickle down to consumers varies based on the type of borrowing you hope to do.

Mortgage rates

More than with other loan types, the time it takes new mortgage rates to trickle down to consumers is tied to other factors. It may depend on whether you hope to refinance your mortgage or buy a new home.

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If you plan to refinance your current mortgage, the refinance rates should drop shortly after each Fed announcement. That's because mortgage lenders are competing for your business.

However, if you're buying a home, you may have to wait a bit longer to find a rate that tempts you. As long as demand exceeds supply, mortgage lenders don't have to compete for customers to the same extent and may not be as inclined to lower their rates as quickly.

Another reason there may be a delay is that many lenders heard rumblings that a Fed cut was on the way and had already factored the first cut into their current rates. As more cuts arrive, you should see a more dramatic drop in rates.

Thinking about buying a home? Click here to learn more about the best mortgage lenders on the market.

Auto loans

While you may see advertised auto loan rates drop immediately following a Fed announcement, your actual rate depends on several other factors, including your credit score, down payment, income and debts, and loan term. In other words, some car buyers will enjoy a steeper rate cut than others.

Credit cards

There's no denying that credit card interest rates are typically much higher than other consumer loan rates. You would probably have to take out a payday loan to find a higher rate. While experts say having credit card debt will get slightly cheaper thanks to lower APRs, don't expect it to be by much.

If you're carrying high-interest credit card debt, your best move is to pay it off as quickly as possible. Let's say you have a balance on a card charging 22% interest. Paying that card off is like putting those interest payments directly into your savings account.

The bumps and bruises of our economy

Most of us long for rock-bottom interest rates, but the Fed will continue adjusting rates upward and downward forever. It's built into our economic system. Simply put, the Fed's job is to promote financial stability.

To illustrate, consider what happened during the pandemic. Very few people on Earth had ever experienced a global pandemic on the scale of COVID-19, and the U.S. government, afraid that the economy would collapse, turned to the Fed.

The Fed lowered the federal funds rate to a range of 0% to 0.25% in an effort to keep the economy chugging along, and it worked. However, the historically low rates also led to inflation. With cheap credit, people were willing to pay far more for houses, cars, and other consumer goods. It wasn't until the Fed raised interest rates that inflation began to cool.

And so it goes -- rates go up and come back down, depending on what the economy needs at that time. While it can be discouraging, it helps to remember that whatever is going on with the interest rates at this moment will not last forever.