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What does Fed rate hike mean to auto loans, mortgages & credit cards?

Dec 16, 2015 02:58 AM EST

Almost all the market players are expecting rate hike announcement from the US Federal Reserve. If the Fed raises the interest rate, it will also  cause an increase in the borrowing costs on mortgages, credit cards and auto loans.

Credit cards rate may not immediately go up. However, the interest rate on debts will go up with immediate effect. The interest rates on auto loans and home loans will mostly be dependent on demand-supply gap in addition to the US Fed's decision.

US Federal Reserve's meeting is scheduled on 16-17 December 2015. The interest rate in focus will be the Federal Funds rate, which banks charged on lending to other banks. The banking analysts give 79 percent probability on the rate hike by US Fed on Wednesday. 

According to a report by TheStreet, the possible rate hike could be 25 basis points. Fed funds rate has been hovering at near zero level since December 2008. 

Further, interest rate on mortgages and auto loans will be driven by market dynamics as the available supply of and demand for credit offtake. The rate on revolving credit is generally linked to US Fed rate hike.

According to a report published by Business Insider, the rate on credit cards and home equity loans will change immediately as per the US Fed's announcement. Paula Campbell Roberts of Morgan Stanley said: "Significant, though not a perfect relationship with changes in interest rates on consumer loans.

While interest rates charged on revolving credit like credit cards and home equity loans are pegged to the target Federal funds rate, credit card rates, in particular have a large variable spread component." 

"I think it's more likely than not that the Fed will hike rates this week. But, consumers need to realize that credit card rates won't rise immediately," a certified financial planner Michael Conway, CEO of Conway Wealth Group.

For those in debt will notice higher interest charges immediately. However, it wouldn't be burdensome for those who're in debt as it could just add $5-10 a month. If the US Fed raises interest rate by 25 basis points. The Fed funds rate is tied to prime rate. 

The US News reports that the US Federal Reserve Chair Janet Yellen has repeatedly hinted on possible interest rate hike. The Federal Reserve's open Market Committee may announce rate hike for the first time since 20006. Contrary to the market expectations, US Fed didn't take any decision on rate hike in previous meetings held in June and September.

Coming to the impact on mortgage loans, Conway opined that the rate increase will not be sudden. "If you're going to get a mortgage, our recommendation would be to consider locking into a fixed rate mortgage as interest rates have fallen for 30 years," Conway said.

For auto loans, the rate hike will be immediately soon after the US Fed announces the hike in interest rate. Conway advises consumers not to rush to buy a car just because the interest rate is going up. Considering one's budget, the consumer should plan accordingly.

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