How to Protect Against Increases in the Prime Rate
ByGeneral— — Posted in
If you have any types of loans then the threat of the prime rate increasing can be quite scary. When the prime rate of interest goes up it will often cause lenders to increase their rates of interest on products that they have, both new and existing. This means that if you have loans then they could get more expensive and if you are considering taking out a new loan, it will be dearer than before. There are some ways that you might be able to protect against the rising costs of loans in the circumstance of an increase in the prime rate.
Choose a fixed rate loan
If you have a fixed rate loan then you will be protected from any rate changes. You will always pay the same rate of interest and so a prime rate increase will have no impact on what you pay. If course, if you take on a fixed rate loan after a prime rate increase then the fixed rate could be higher. However, it will protect you from future increases. You do need to be careful though of how long the fixed rate will last. With some fixed rate loans it will be for the whole term of the loan, but for some loans it will only be for the start of the loan and then it could move onto a variable rate. If this is the case then you may want to look into whether you will be able to move the loan to a fixed rate.
It is wise to be careful with fixed rate loans though. Although it will protect you from rate increases, it will also stop you being able to take advantage of decreases in the prime rate. If you feel that the rate is likely to fall during the course of the loan, you will need to calculate whether you think the fixed rate would seem fair in light of this or whether you think that having a variable rate will be better.
If you have some savings to fall back on then this can be useful. It will mean that you can have peace of mind that you have something to help you out should you struggle to make a loan repayment. If you do have quite a lot of money saved then it could be wise to use it to repay the loan and then you will no longer need to worry about the rates at all as you will not have a loan. You do need to be wary of repaying early though as there can be charges for this. Make sure that you are aware of whether there are any and how much they are to see whether it is actually worth repaying the loan early or not. Sometimes the charges are so high that it is cheaper not to repay the loan early.
Try to increase your income
If you can increase your income a bit it will allow you to keep being able to afford the loan even if the rate goes up. If you start earning more as soon as possible, you will be able to put some money aside into a savings account in order to help you out when you need it or use some to repay some of the loan. There are lots of ways that we could earn a little more, such as taking on a few more hours, doing some work form home jobs or selling things that we do not need but if we want a significant increase in income, we may have to change our job or even start our own business. This can need a huge lifestyle change and new commitment and so is not something that should be done lightly.
Spending less can always be helpful particularly when you have a loan. It is good to compare prices and buy less items that you do not really need. This will enable you to more easily afford the loan and if the repayments do increase you should still have enough money to be able to afford them. It is not always easy to do this. Sometimes it can feel like we are punishing ourselves because we are going without things that we like. However, it is worth keeping in mind that we need to repay our debt and once we have done, we will be able to treat ourselves again. The debt will be costing us money and the sooner we repay it the cheaper it will be. It might even be worth writing down the goal and putting it somewhere prominent to remind ourselves of why we are being so careful with our spending. Hopefully then you will not feel so bad about reducing what you are buying.