Low interest rates make big purchases easier

Matt Chock

In an attempt to stave off a possible recession, the United States Federal Reserve has lowered interest rates to some of the lowest levels in years, and students might be able to take advantage.

The Fed’s discount rate, the rate at which it loans money to financial institutions, is at 3-and-one-half percent – the lowest it has been since 1994.

Banks and other money lenders use these loan rates as benchmarks for the rate at which they loan money to the public.

Hence, the lower discount rate results in financial institutions charging less interest in order to make a profit.

What does this mean to someone who is currently in or just getting out of college?

It might be a good time to look into making a major purchase that would require a loan.

The current discount rate has become more relevant in the sectors for which loans are given, one of the most noticeable being the auto industry.

Some car retailers are offering financing for new autos for as low as a 0.9 percent Annual Percentage Rate, and some with no interest charged at all.

The advantage of taking out a loan with a lower APR is that more of the money spent on monthly payments goes directly to paying off the item you purchased rather than the interest accrued on the loan.

Many car dealerships are offering loans with 0.9 to 5.9 percent APR financing, with different rates depending on the type of car and the length of the payment plan.

Expensive cars and longer payment plans generally will have higher interest rates than less expensive cars with short-term loans.

“Banks are looking for people with a stable income, so buying a new car might be more tailored to someone just graduating from college,” said Duane Helmbrecht of Wally McCarthy’s Chevrolet-Oldsmobile-Cadillac.

However, for those still in school and considering the purchase of a new car, Helmbrecht said purchasing while interest rates are low will save money in the long run.

“With the way the economy is right now, it is really a good time for anyone to buy a car,” he said.

Mitch Nemetz, a sophomore at Augsburg College, recently purchased a 2000 Ford Mustang.

He said he bought the car because he “needed a new car, and got a good deal on it.”

The interest rates on car loans are down around two percent on average and 30-year mortgages are down one to one-and-a-half percent from a year ago at this time.

Rates this low could translate into large savings on loans.

On a 30-year, $150,000 home mortgage, the difference between an APR of eight percent and seven percent is $130 per month.

That totals $46,800 that could be saved for retirement or used on things such as a vacation – and that’s if the money is spent in the month it’s saved.

Investing that money into something such as a mutual fund, or even just putting it in the bank at an interest rate would make it even higher.

On car loans, however, the savings are not as substantial.

On a four-year $15,000 car loan, the two percent difference between a 10 percent and eight percent interest rate would amount to savings of around only $15 per month.

“It is a good time to buy real estate, but doesn’t matter quite as much for car loans,” said Mark Wingerd, a financial consultant with American Express Financial Services.

Therefore, those students who have recently graduated and are thinking about purchasing a house might want to consider buying sooner, while interest rates are still low.

Whatever the status in school, the interest rates are low enough that now is a time to consider making a major purchase.

 

Matt Chock covers business and welcomes comments at [email protected]