2 Reasons Interest Rates Will Rise & 2 Ways to Avoid Higher Rates

Forecasting the future is always hard. Companies pay big bucks to economists in an effort to get an edge on what might happen in the financial markets. Sometimes they’re right. And, sometimes they’re wrong.

But sometimes a review of relevant facts can shed light on what the future may bring. Or at least make it easier to predict a direction. Given the current situation it would appear that forecasting the future for interest rates would be such a case.

For instance, experts expect the cost of borrowing to increase nearly 40% for the G7 governments. They’ll be borrowing over $8 trillion in the next year.

Now that’s not to say that everyone’s costs to borrow will increase by 40%. Part of that rise is due to the fact that some governments have a lower credit rating than they did a year ago.

Central banks and the Federal Reserve Board are trying to combat the problem by keeping interest rates artificially low to make borrowing affordable for the governments. But that’s not easy. Lower rates means that fewer buyers are interested. Rates have to be high enough to attract enough buyers.

Bottom line is that governments will be borrowing a lot of money in 2012. Competing with you and I for loans. The way they compete is to offer a higher interest rate on the money they borrow.

Another aspect of demand comes from you and I. Will we be borrowing more than we did in 2011? There’s some evidence that we will. Economic forecasts for the next year are all over the lot. But the average runs about 2 to 3% growth for the US economy in 2012. Any growth in the US economy is likely to be accompanied by increased consumer spending. Spending that will probably be paid for by increase borrowing on credit cards.

Again, more competition for loan dollars. Paid for with higher interest rates.

Ok, so let’s agree that higher rates are a distinct possibility. So what can you do to protect yourself?

The first answer is to take a look at your debts. How much do you owe on all your outstanding loans? Make a list. On that list include the current interest rate and whether than rate can be changed by the lender without your permission.

You want to concentrate on the loans where the interest rate can be increased, often called variable rate loans. If you’re unsure whether a loan is fixed or variable contact the lender.

Pay off as much of the variable rate loans as possible as soon as possible. Use any sources of extra money you can find. Cut expenses and/or look for additional sources of income that can be applied to your loan. Pay only the minimums on fixed loans and use an extra on your variable loans.

Then look for opportunities to shift debt from variable to fixed rates. If you have equity in your home now is a good time to consider refinancing. Use the proceeds to pay off your existing mortgage and credit card debts.

Another possibility for shifting from variable to fixed loans would be to borrow from your 401k to repay variables like credit cards.

A caution to those who struggle with debts. Reducing your credit card balances does not give you permission to charge them up again. You need to commit to keeping the balances down.

Naturally, there’s no guarantee that interest rates will rise. Those things are never certain. But, even if you take action and rates don’t go up you’ll be in a better position. You’ll have fewer debts and be paying a low interest rate on them. And, if rates should increase, you’ll be glad that you took action now.