3 Ways the Fed’s Interest Rate Hike May Affect Your Online Finances

As the Federal Reserve ramps up interest rates this summer, financial entities are on the brink of implementing significant adjustments to their strategies. Yet, how will this affect the fintech sector, including digital banks, online lending platforms, and robo-advisors?

Marketed as an alternative to traditional banking, fintech has a cheaper, more accessible business model. Yet they might not be immune to the sharp changes to the overnight rate. Here’s a breakdown of three things that this increase could mean for you and fintech at large.

1. You Could Pay More the Next Time You Borrow Money

First and foremost, the latest rate hike will change how you borrow online. Its most direct effect on your finances is how lenders set their interest and finance charges.

Depending on the financial institution, the latest hike may not impact your rates the next time you borrow, but it is a good bet. Changes to the overnight rate are often reflected in the prime borrowing rate of the biggest banks. These increases may even impact digital banks and fintech lenders.

The prime borrowing rate represents the lowest (or best) possible interest rate offered by financial institutions today.

Not all consumers can access this rate if they apply for a loan online or in-person. A lot of factors impact what you pay, including whether your financial institution uses risk-based pricing and how your score reflects their standards.

Prime borrowing is usually only ever available to someone with excellent credit, but the changes to prime will trickle down through almost every credit level.

That means the increase to prime will follow suit across all financial products, from the average credit card to installment loans for bad credit — even online loans could be in the crosshairs.

With short-term personal loans and lines of credit costing more, experts advise putting off borrowing as long as possible. Instead, try to delay big purchases until you can save up enough on your own.

But with consumers borrowing less, what happens to digital banks? With a business model known for low pricing, any changes to their funding costs could take a swing at their margin and scare away customers.

2. Open Loans and Lines of Credit Could Cost More if They’re Variable

The central bank’s meddling with interest rates won’t just apply to new short-term personal loans and lines of credit you take out in the future. It may apply to current online loans you have today, even if you borrowed them years before the latest hike.

It all depends on how your financial institution charges interest to these open accounts. If your contract stipulates you have variable interest, the interest charged to your outstanding balance will mirrorany changes to the overnight interest rate.

This variability is an advantage in peaceful times. When the Federal Reserve keeps a cap on rates, the interest you pay will remain low.

But we’re living through an interesting economic moment, so it can be a disadvantage when compared to fixed accounts.

Variable borrowers will pay more when the Federal Reserve steps in to increase rates, whereas borrowers with fixed rates won’t see any change at all. That’s because fixed borrowers locked into their interest rate when they took out their short-term personal loans.

Almost any loan has the potential to be variable—you’ll know whether your outstanding accounts are variable by referring to your contract.

That said, most credit cards often come with variable rates, which means carrying over a balance comes with bigger consequences these days. Since you’ll pay more to cover the interest on any outstanding balances, you’ll want to double down on your debt payments on credit cards to make sure you rarely, if ever, carry over a balance. 

3. Your Savings Accounts Will Earn More Interest

Finally, some good news: the Federal Reserve’s hike will also factor into the interest you earn on savings. You can capitalize on higher yield savings accounts to earn more on the money you keep in the bank. If you needed an incentive to sock away more into your emergency fund, here’s your sign to do so.

Unfortunately, there’s some bad news, too. Even high-yield digital savings accounts usually cap at about 2 percent, which is a far cry from today’s 9 percent rate of inflation. The longer inflation remains this high, the less purchasing power your money will have in the future.

For greater returns, investing is a better option. However, it’s not a good idea to invest your emergency fund into stocks or bonds through robo-advisors, as they can tie up money for months.

Wait to invest in the market until you have at least three months of living expenses in a regular savings account. That way, you’ll always have something liquid you can access at a moment’s notice.

As for the fintech industry, higher savings rates could spell trouble for digital banks. For years, they offered interest rates 10-times that of a traditional bank. They stand to lose this competitive advantage should banks raise their rates significantly and customers jump ship.

Changes Are Coming to the FinTech Community

Fintech doesn’t exist in a vacuum. Although it’s an alternative to traditional banking, fintech is a regulated player on the board. And right now, the game includes higher interest rates to control inflation after hitting a 40-year high. That could mean changes to your savings and the cost of online loans.

Krystal Morrison

I create this blog to share my daily tips about home improvement, children, pets, food, health, and ways to be frugal while maintaining a natural lifestyle. Interested to be a Guest Blogger on my website? Please email me at: [email protected]

Click Here to Leave a Comment Below 0 comments

There are affiliate links in this post. At no cost to you, I get commissions for purchases made through links in this post.