Just a few years ago savvy investors took out debt or refinanced higher interest loans to take advantage of the record low interest rates. They’d then invest their savings in an effort to earn a higher return on their investments than their debt would cost them in interest. Taking advantage of this “hurdle rate” was an easy decision. Today, the decision to put cash toward paying off debt or investing isn’t as clear.
In their continued efforts to try to head off inflation, on March 22 the Federal Reserve announced its second rate hike of 2023 – increasing the Fed Funds rate by a quarter of a percentage point (0.25%). A change in the Fed Funds rate affects the rates consumers pay for financial products like mortgages, car loans, and credit cards, and earn on CDs and other savings vehicles.
Prior to 2022, 30-year mortgage rates were averaging 2-3%. Today 30-year mortgage rates are averaging around 6.5%.
According to Experian’s State of the Auto Finance Market report, in the fourth quarter 2021 the average car loan interest rate was 3.86% for new cars and 8.21% for used cars. Today, the average car loan interest rate is 6.07% for new cars and 10.26% for used cars.
Clearly, the days of accessing cheap money are over. So,
Given today’s higher interest rates how should you think about paying off debt?
Listen in as we answer this question in our monthly market update.
Each month on our Wealthy Behavior podcast Heritage Financial CEO, Sammy Azzouz, and CIO, Bob Weisse, discuss what’s going on in the investment universe and markets right now. Click here to listen to the full March Market Update episode where they also covered:
- Reasons behind February’s market swoon.
- Bob’s investment outlook – What he’s optimistic, and pessimistic, about today.
- What causes inflation? Debt? Money supply? They debate different theories on inflation and how to get it under control.
- An explanation of common public market investment strategies and vehicles – Pros and cons of ETFs vs. Direct Indexing vs. Mutual Funds.
Two new Wealthy Behavior episodes are released each month. Listen and subscribe to stay on top of the latest financial trends.
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