How will lower interest rates impact my financial goals?

The Federal Reserve (aka the Fed) has two main goals, known as its dual mandate: keeping prices stable and maximizing employment. To accomplish this, the Fed typically raises interest rates to curb inflation and cuts rates to support a weakening economy.

Per the Federal Reserve Bank, interest rates had been perched at a 23-year high for about a year before the Fed began lowering rates in the second half of 2024. Against the backdrop of rate cuts, many people might worry about the impact of low interest rates on their financial goals, like saving for retirement, buying a home, or paying off student loan debt. 

 Benefits of lower interest rates for consumers

First, the good news: Lower interest rates can help consumers save money, pay off their debt faster, and reach their financial goals sooner. Let’s take a closer look at some of the main benefits of lower interest rates.

Borrowing costs might become cheaper

When interest rates drop, the cost of borrowing may decline, as well. New borrowers aren’t the only ones who stand to benefit from lower rates, though; those with variable-rate loans might also see their interest costs drop.

This is because many loans are tied to the prime rate, which is the interest rate banks use when loaning money to individuals and businesses. When federal rates decrease, the prime rate often follows.

A lower federal interest rate typically means borrowers can eventually secure slightly better mortgage rates, according to Joe F. Schmitz Jr., CFP^®, founder and CEO of a retirement planning firm. “The same goes for any new line of credit, such as credit cards, home equity loans, and auto loans,” he says. But the move isn’t guaranteed or immediate; according to Bankrate, federal rates are just one variable mortgage and other lenders consider when setting their respective rates.

“First-time homeownership will potentially be more attainable if interest rates continue to drop,” Schmitz says. But exercise caution: “Don’t rush the homeownership process just in light of a small rate cut. Ensure you’re financially ready to purchase a home by having a good down payment saved up and an emergency fund in place.”

Credit card interest debt could be reduced

If you can afford to pay down credit card debt when interest rates are lower, you stand to save money and speed up your journey to becoming debt-free. When interest rates drop, credit card interest rates might also decrease, offering some relief to those carrying debt. While this can make it easier to pay down balances, the savings are often modest, so managing expectations is important.

“It depends on the terms and conditions of your credit card, as well as your credit score, whether or not you’re likely to see a significant decrease in your interest rate,” Schmitz notes. Refer to your monthly statement to monitor if your rate has moved. You could also contact customer service at your credit card company to ask if they plan to adjust rates in response to economic moves at the Fed level.

And if the interest rate on your credit card has decreased, it’s a great time to pay down debt more aggressively, Schmitz says, as payments will be applied more toward the principal than the interest. “Continue paying what you’re accustomed to, even if the minimum payment has gone down because of the rate cuts. This will put more money toward the principal each month and help you pay off the debt faster.”

Spending and investing are encouraged

When interest rates drop, there can be confusion about whether it’s a good time to spend or invest your money. “Investing is a long-term play—never a short-term move,” Schmitz says. “If you have money you won’t need for the next decade or so, now’s a good time to consider investing in the market for retirement or another long-term objective.”

On the spending side, lower interest rates tend to reduce borrowing costs, which might make it easier to finance big purchases. From a cost standpoint, inflation has eased compared to recent years, Schmitz notes. “Whether or not it’s a good time to spend depends on your financial situation and stability.”

Challenges of lower interest rates for consumers

While lower interest rates can help people save money when borrowing, they also impact how fast their savings will grow—among other challenges.

The rate of your savings returns might slow down

While lower interest rates can mean savings grow more slowly, saving should remain a priority. Be diligent and shop around for the best rates to help you maximize your earnings and keep your financial goals on track. High-yield certificates of deposit (CDs), savings accounts, and checking accounts with cashback benefits remain excellent options for building your balances, even in a lower-interest-rate environment.

“For those seeking moderate growth and a safe place to park their money, high-yield savings accounts have allowed many people to park things such as emergency funds, temporary savings, and sinking funds in accounts that are higher interest bearing than an average savings account,” Schmitz says.

Opening an online savings account can make it easier to find higher savings rates even as interest rates decline. Online banks like Discover^® may have lower overhead than brick-and-mortar institutions and might be able to offer higher-yield savings opportunities.

One way to boost your earnings is by increasing your savings balance itself. Larger balances grow faster thanks to compounded interest, even in the event of a savings account interest rate drop. Look for areas in your budget where you can cut back to maintain consistent contributions.

Keep your options open—and your portfolio diverse   

When growth slows on your savings interest, it can become harder to stay motivated. To overcome these feelings, Schmitz suggests keeping some of your cash in savings vehicles with a broader outlook that’s consistent with your risk tolerance and objectives. Purchasing longer-term CDs or IRAs or boosting your 401(k) contribution could help keep your savings goals on track.

“Regardless of interest rates, it’s smart to have some of the cash you may need within the next few years in vehicles that will be more risk averse to a down market,” Schmitz recommends. This conservative thinking helps avoid “double loss,” or pulling money out of an investment account when the market is down. As always, consider consulting a financial advisor to discuss your specific situation, needs, and goals.

Open a Discover Online Savings Account today—and start saving over 5x the National Savings Average.¹

¹ The Annual Percentage Yield (APY) for the Online Savings Account as of XX/XX/XXXX is more than five times the national average APY for interest bearing savings accounts with a balance of $500 as reported by Curinos as of XX/XX/XXXX. National average is based on information regarding the top 50 banks (by deposit size) and may not include information from variations in regional pricing at such banks or information from products that may not be widely available to their customers. Rates were obtained from Curinos, who relies on the data from the banks it tracks and such information cannot be guaranteed. APYs are subject to change at any time.

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