Here's how high interest rates can help build your savings
Higher interest rates make it more expensive to borrow money, but they are good for saving. (iStock)
Middle-income Americans could be missing out on a chance to offset high inflation and rising costs by earning more on savings in the current high-interest rate environment, a recent Santander survey said.
The biggest hurdle preventing many from tapping into higher-yielding accounts to take advantage of these rates was a lack of financial knowledge. Just 1 in 10 respondents (11%) could answer four questions about savings accounts correctly. The 41% who responded correctly were more likely to have moved money to take advantage of higher rates versus the 25% of respondents who answered the questions incorrectly.
"Having the information needed to make important financial decisions is crucial for reaching one's financial goals," Santander US CEO Tim Wennes said.
The Federal Reserve has raised interest rates 11 times since March of last year, pushing the federal funds rate to a 22-year high of 5.25% to 5.5% in a bid to lower soaring inflation. Interest rates on credit cards and auto loans have reached historic highs, mainly in response to the Federal Reserve's aggressive campaign of rate hikes in 2022 and 2023.
However, the higher rates make it easier to earn more on savings. Roughly 84% of respondents said they had savings, but the majority earned less than 3% on those funds despite banks now offering the highest rates on certificates of deposit (CD) and high-yield savings accounts in years.
With CDs, money is deposited for a fixed period, ranging from a few months to several years. In exchange, those funds earn a higher interest rate when compared to regular savings accounts. A high-yield savings account, also known as a high-interest account, offers higher interest rates on deposits than a traditional one. The interest rate is an annual percentage yield (APY) that fluctuates. However, these accounts allow you to make deposits and withdrawals.
If high-interest debt is putting a dent in your finances, you could consider paying it down with a personal loan at a lower interest rate. Visit Credible to get your personalized rate in minutes.
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Return of student debt
Student loan payments resumed again in October after a more than three-year pause, with borrowers paying an average of $203 a month. Of the Americans with student debt, 69% said that it would impact their ability to achieve financial prosperity, according to the survey.
Even Americans who don't have student debt are indirectly impacted by the return of student loans. The survey said that 13% of respondents are helping someone in their household make debt repayments and 2% are paying their own and someone else's loans.
The debt obligation is so onerous that one in four Americans with outstanding student loans said they planned to boycott payments, according to a poll commissioned for Newsweek. While 33% said they would consider refusing to pay.
"Over the course of the student loan payment pause, many consumers who currently have student loans acquired new credit products, increasing their monthly payment obligations," Liz Pagel, TransUnion's senior vice president of consumer lending, said in a statement. "For many consumers, their total monthly payments today, without student loan payments, exceed what they were paying in aggregate in 2020 prior to the pause. Adding the new payments to the mix will be a noticeable payment shock."
If you have private student loans, you may not benefit from Biden's student loan relief programs. But you could consider lowering your monthly payments by refinancing your loans to a lower interest rate. Visit Credible to check your rates and see what you qualify for without affecting your credit score.
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Auto costs soaring
Most middle-income Americans (76%) rely on a vehicle for their work commute, according to the Santander survey. However, gas and higher auto prices have made vehicle access more difficult, pushing 50% of respondents to delay purchasing a car in the past year.
Despite these challenges, car demand is high, with 41% considering a purchase over the next 12 months. A quarter of these Americans said they would be more likely to purchase a vehicle in the year ahead if they can secure financing.
In recent years, vehicle costs have skyrocketed along with rising interest rates, leading to increased borrowing costs. Both new and used annual percentage rates (APR) reached levels not seen since the Great Recession, according to Edmunds data. New vehicle APRs hit 7.4% in the third quarter of 2023 and used-vehicle rates climbed to 11.2%. On average, borrowers spend roughly $736 a month on auto loans.
One way to take control of car ownership costs is by making sure you are paying for the insurance you need. Shopping around for new auto insurance could help lower your costs. The Credible marketplace can help you compare multiple providers and find your personalized rate in minutes without affecting your credit score.
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