Savers have been doing a lot of complaining recently about the low interest rates they’re being offered for CD’s and money market accounts. A low interest rate environment is a risk for people holding a lot of cash, especially if inflation picks up like many economists are expecting. However, a low interest rate environment has advantages for borrowers and many individuals, companies, and government entities are taking advantage of a very attractive time to borrow. Here are some of the ways that low interest rates are providing opportunities for those in need of cash.
– Individuals: Millions of people have taken advantage of low interest rates by refinancing their mortgage loans. During the first several years of this decade, homeowners were using adjustable-rate mortgages (ARMs) to keep their monthly payment as low as possible. Many of these loans were interest only, with the borrower paying nothing toward principal for the first several years of the loan. The collapse of the housing market combined with the rates on ARMs increasing has led to refinancing activity like we have never seen before.
The Fed has done its part to keep interest rates on mortgages low in an attempt to revive the housing market and has indicated that they hope to keep mortgage rates low for the next several months. Interest rates have increased a little from their low point on 30 year fixed mortgages but they are still very low from a historic perspective. Individuals can qualify for these low rates by having strong credit, low debt, and stable, steady income.
– Businesses: Companies have to be careful about borrowing cash right now since sales revenues in most businesses have fallen substantially. Many companies are more worried about staying in business right now than they are about obtaining financing to grow. However, businesses hoping to expand are finding that they can borrow from banks at low rates and lock those rates in for the next several years.
Small businesses have the option of taking advantage of loans backed by the Small Business Administration that are designed to help business owners pay off the bills that have been mounting during the recession. Large companies have the option of borrowing from the bond market at low rates if they are a highly rated company. Borrowing money during a downturn can be risky for a business, but it can also give that company an advantage over competitors as the economy transitions into recovery.
– Government: The Federal government is spending massive amounts of money right now in projects related to President Obama’s economic stimulus package. The money being spent isn’t coming from the nation’s savings account. Instead, it’s being borrowed and investors looking for safety are willing to loan money to the government for almost nothing. Treasury auctions are making billions of dollars available to Uncle Sam and its being spent almost as fast as it’s being received.
State governments are also taking advantage of the opportunity to borrow at low rates. New debt from state and local government is up 5% from a year ago and states that are still highly rated are getting great deals. Utah, for example, just borrowed a billion dollars for 15 years with an interest rate of 2.72%–a rate that would have seemed too good to be true a few years ago. Because of low rates, states are borrowing more cash than they originally budgeted for just to stockpile it for future projects.