How to Minimize Interest Rate Risk
Interest is the cost of any loan, from a mortgage to a car payment to student loans and even investment loans. Minimizing the risk of interest rates moving against you not only ensures that a loan is affordable, it also avoids problems that result in foreclosures, bankruptcy or lowered credit scores. Interest-rate risk is easily avoided or minimized by working out the details of a loan and understanding all the paperwork associated with it.
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Instructions
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Read all of the information provided with a loan, credit card or any other type of unsecured credit, and understand the rate you are getting on a mortgage or other long-term obligation. Never sign paperwork without knowing the details, especially whether the interest rate is fixed over the entire lending period, or whether it can rise. Know when and how the interest rate will change, if it is not fixed.
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Avoid variable-interest rate loans, especially in today's low interest-rate environment. Variable rates can change from a low rate like 4 percent to a high rate of 15 percent or more if inflation rises rapidly. If a variable rate is unavoidable, as is often the case in private student loans, take out the minimum amount necessary for the loan and read all of the details relating to the interest rate and how it changes.
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Watch for any interest rate changes on a loan, credit card or investment. If the interest rate changes, especially if it is not a variable-interest rate, call the company and find out the reason. Always pay attention to changes, especially if there are no late payments or other reasons for a rise in interest rates. Credit card companies are quick to raise your interest rate on balances outstanding if you make a late payment.
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Find out the maximum rate that any loan or credit line can potentially end up having. For example, a credit card might start at a rate of 6 percent, but the maximum rate it could rise to in the event of late payments or other problems might be 20 percent or higher. Make sure that even at the maximum interest rate, the loan or credit is affordable.
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Tips & Warnings
Try to lock in a fixed rate if borrowing for long-term needs (house, car, college expenses) in today's economic environment. Rates, especially mortgage rates, are at or near historic lows.
Take your time when borrowing. The low-rate environment is likely to last well into 2011, given the weak economy.
References
- Photo Credit investment image by Kit Wai Chan from Fotolia.com
