Most of you have heard the above countless times over the last several years, but do you really know how to apply it to your life? Sure, if you have sufficient equity in your home, there’s likely no better time to refinance, substantially improve your rate, shorten your term and save yourself thousands of dollars in the long run. But, aside from that, most just observe the negative impact of low rates in the paltry earnings paid in savings accounts, money market funds and similar vehicles.
The Federal Reserve has signaled that they foresee rates staying at or near lows into 2014. But, at some point, rates will march upward once again. Before that occurs, it’s important to consider various ways in which you can take advantage of low rates. Much like large companies have used the last several years to save, restructure and achieve some of the healthiest balance sheets in years, now is also a good time to make sure you’re in the best possible position moving forward.
So, what can you do besides try and refinance that mortgage? Today we’ll focus on three areas impacted by the low interest environment that you may be ignoring.
This is an area where refinancing is not often discussed. Car loans are short in term and rates rarely move enough to make it worthwhile. However, there are three instances now where I’d suggest taking a look at potentially revisiting an auto loan.
- You currently have a higher-rate car loan and your credit or income situation has improved.
- You purchased a used car and didn’t shop for competitive rates.
- If you’re a member of group one or two, now might be the time to look for a lower rate. Many banks and credit unions are offering competitive deals. For example, a local credit union in Cincinnati was recently offering rates as low as 1.79% over 60 months on 2009-2012 models with no fees for signing up. Even over a short term, interest savings can be substantial. Use this opportunity to lower your current payment or shorten the time it takes to pay it off.
- You owe very little or own your car outright, but have other, high interest debt.
- You may want to look at this opportunity as a way of borrowing cash to pay off higher interest debt (like that credit card bill). The lower rate will save you plenty and the short term will get you out of the cycle of paying minimums and force you to pay it off. The most important thing is to have the discipline to lock that credit card up and start living on what you can afford going forward.
Premiums for life insurance rates have also fallen substantially over the last several years. Interest rates play a role here, as does the market overall. If your health hasn’t changed substantially, rates can be sharply lower despite your aging since you last priced your policy. Rates vary all over the place based on a number of factors, but the savings can be substantial. An important note, even after getting a new quote and passing the physical, never cancel an existing policy until the replacement has been signed, sealed and delivered.
Prepay for Services
There are any number of services, such as property & casualty insurance, lawn care, private school tuition, just to name a few, where a discount is available for paying in advance or in a lump sum. In a more typical interest rate environment, the thought is often to forego this offer as the interest you’d earn on that money alone is worth more than the discount. Not so these days. While ensuring not to damage your cash flow or any other savings, take advantage of these pre-payment discounts wherever available. The savings is likely to outperform your money market.
Low interest rates can feel like a drag on our ability to meaningfully grow our savings. It’s important while in this historically low environment to make sure you’re doing everything you can to position yourself for long term success by taking care of some of the advantages low rates offer too.
Chip Workman, CFP®, MBA
The Asset Advisory Group