5 things that get cheaper when the Fed cuts interest rates

The old-fashioned way to buy a car.

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The old-fashioned way to buy a car.
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REUTERS/Carlos Barria

On Tuesday, the Federal Reserve lowered the federal funds rate by 0.5%, meaning Americans are likely to see interest rates fall on everything from loans to credit cards.

Greg McBride, chief analyst at Bankrate, told Business Insider following the Fed’s rate cut in July that some interest rates are more closely tied to the Fed’s fund rate than others. “When interest rates go down, consumers will typically see a similar decrease in credit card rates, home equity lines of credit, variable rate student loans, and small business loans,” he says. Mortgages, however, won’t see much of an effect, as they tend to move independently of the Fed’s rate changes.

Here are five things that should get cheaper with an interest rate cut from the Fed.


1. Starting or growing a small business

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Small business loan interest rates will be affected by the Fed’s decision.
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Getty Images

Those who are looking to take out small business loans will see lower rates thanks to the Fed’s decision to cut rates. Business loans generally follow the federal funds rate and the prime rate, which Business Insider’s Bob Bryan describes as “the interest rate used as a starting point for non-mortgage loans.”

If your small business needs a little extra cash to get to the next level, lower interest rates will help make getting a small business loan more affordable.


2. Paying off credit card debt (or consolidating it)

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Credit card interest rates will likely fall.
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Matt Cardy/Getty

Interest rates on credit cards are closely tied to the prime rate, so you’ll likely see decreases near .5% on interest rates.

Americans now owe about $930 billion in credit card debt, as Business Insider’s Hillary Hoffower reports, and Value Penguin estimates that the average American household has about $5,700 worth of credit card debt. With interest rates low, now is a good time to start dealing with it.

With this decrease, there’s an opportunity to pay off credit card debts at a lower interest rate, or consolidate debt and lock in that lower interest rate.


3. Paying off variable rate student loans

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Only those with variable rate student loans will see an effect.
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Scott Olson/Getty Images

For those with variable rate, private student loans, they just got cheaper. Variable rate loans are closely tied to the Libor or prime rate, and with that decreasing, you’ll likely pay less in interest.

That said, it might also be a good time to refinance, and lock in a lower fixed rate on student loans. However, those who already have fixed rate student loans won’t see any effects.


4. Using a HELOC to make home renovations

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HELOC loans can help pay for home renovations, and their rates just lowered.
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OlgerFallasPainting via Compfight cc

Considering giving a bathroom, kitchen, or backyard a makeover, but need a loan to make it happen? Homeowners can take advantage of the fact that home equity lines of credit just lowered their rates.

Bankrate reports that the average HELOC rate is at 6.09% as of March 3.

Since HELOC rates are very closely tied to the prime rate, there’s a good chance that these will drop by about the same amount as the amount that the prime rate dropped. In this case, it’s likely that HELOC interest rates will fall by 0.5%.


5. Buying a car

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The old-fashioned way to buy a car.
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REUTERS/Carlos Barria

Whether you’re planning to buy a new or used car, the interest rates on auto loans will likely fall along with the prime rate.

In the third quarter of 2019, auto loan interest rates were high. Data from credit reporting company Experian showed the average interest rate on a new car loans at 5.96%, and the average used car loan with an interest rate of 9.57%. This cut could make auto loans less costly.

While the rate cut will have no effect on existing loans, it might be a better time to look around and refinance your auto loan if you’re feeling like your interest rate is too high.