How does my APR affect me?

Every time the Fed makes any movement on interest rates, the reasonable question is, "What will this do to me?"  For most people, the acts of Janet Yellen and the Federal Reserve Board seem unrelated to the lives of the average person.  The simple fact is that the Fed’s actions affect how the average person borrows money, and the trend of rising interest rates will hit the consumer.

The most obvious effect of the interest rate hike is on variable interest rate debt in the form of the Annual Percentage Rate (aka APR).  The most common used form of variable rate debt comes in the little plastic card we keep in our wallet and use to buy practically everything these day, your credit card.  But it can also affect other loans for things like a new or used car, boat and even your mortgage.

This exercise and the calculators on this page will help to show you the effect of a change in your APR when:

1. using your credit card (e.g. buying holiday presents),
2. borrowing for a used car,
3. buying a new house.

We will use the recent Fed rate hike of a quarter of a percent (¼%) as the change in APR.

Credit Card Debt

To bring this home, let’s work through a simple example and plug the numbers into these calculators.  For the example, let’s assume that your family puts $500 on a credit card this Christmas.  And let’s assume two different interests rates.  The first is the average rate of most credit cards which is about 12%.  And then let’s consider this after the FED’s 0.25% increase.  With the change in APR, we will use these calculators to tell us two things:

1. What's my monthly payment going to be?
2. How much with that $500 really cost with and without the rate hike?
3. How long could it take to pay off that $500 debt with and without the rate hike.

Payment and Total Loan Cost

First, let’s figure out what our payments would be if we decided we wanted to pay off our $500 debt in 10 months.  To do this use the Monthly Loan Payment equation and enter the following:

• (P) - $500  Loan amount
• (i) – 12% Annual Percentage Rate (APR)
• (n) – 10 monthly payments (We don’t want to be still making payments NEXT Christmas)

The Monthly Loan Payment equation tells us that our monthly payment will be $52.79.  Second, the Total Loan Cost equation will tell us that the $500 Christmas debt actually costs $527.90.  That’s $27.90 in financing.  If that doesn’t seem like much, it’s because you’ve decreased your principal pretty fast and each month.

After the change in APR

Now we make the same calculations, except we use 12.25% APR (i).  The monthly payment goes from $52.79 to $52.85.  Yes, that’s only six cents more per month. And the total loan cost goes from $527.90 to $528.50, which is a total additional expense of sixty cents ($0.60).  
So, for short-term debt and short payoff times, the effect is very small.  It's a little different when you borrow bigger amounts and payoff over longer periods. 

Buying a Used Car

Another common form of consumer debt comes when you buy a car with a car loan.  So, this little exercise and the calculators on this page will simply show you the effect of the FED’s rate hike on the debt you may incur buying your new ride.
To bring this home, let’s work through a simple example and plug the numbers into these calculators.  For the example, let’s assume that you borrow $25,000 to buy a new Honda Accord.  And let’s assume two different interests rates.  The first is the average rate of most new cars which is about 4.67%.  And then let’s consider this after the FED’s 0.25% increase.  We will use these calculators to tell us two things:

1. What's my monthly payment going to be on a 5 year car loan?
2. How much with that $25,000 car really cost with and without the rate hike?

Payment and Total Loan Cost

First, let’s figure out what our payments would be if we decided we wanted to pay off our $25,000 debt in 60 months.  To do this use the Monthly Loan Payment equation and enter the following:

• (P) - $25,000  Loan amount
• (i) – 4.67% Annual Percentage Rate (APR)
• (n) – 60 monthly payments for a five year loan.

The Monthly Loan Payment equation tells us that our monthly payment will be $468.01.  Second, the Total Loan Cost equation will tell us that the real total cost with interest is $28,080.60.  That's $3,080.60 in finance charges.

After the FED hike

Now we make the same calculations, except we use 4.92% APR (i).  The monthly payment goes from $468.0 to $470.87.  Yes, that’s only two dollars and eighty six cents more per month. And the total loan cost goes from $28,080.60 to $28,352.20, which is a total additional expense of $171.60.

Buying a Home

Typically, the biggest consumer debt that we encounter comes when you buy a home.  
To bring this home, let’s work through a simple example and plug the numbers into these calculators.  For the example, let’s assume that you borrow $210,000 to buy a new home.  And let’s assume two different interests rates.  The first is the average rate of most new cars which is about 4.67%.  And then let’s consider this after the FED’s 0.25% increase.  We will use these calculators to tell us two things:

1. What's my monthly payment going to be on a 30 year mortgage?
2. How much will it really cost with and without the rate hike?

Payment and Total Loan Cost

First, let’s figure out what our payments would be if we decided we wanted to pay off our $210,000 debt in 30 years (360 months).  To do this use the  Monthly Loan Payment  equation and enter the following:

• (P) - $210,000  Loan amount
• (i) – 4.67% Annual Percentage Rate (APR)
• (n) – 360 monthly payments for a thirty year loan.

The Monthly Loan Payment equation tells us that our monthly payment will be $1,085.35.  Second, the  Total Loan Cost  equation will tell us that the real total cost with interest is $390,729.60

After the FED hike

Now we make the same calculations, except we use 4.92% APR (i).  The monthly payment goes from $1,085.35 to $1,117.08.  That's $31.73 more per month. And the total loan cost goes from $390,729.60 to $402,148.80, which is a total additional expense of $11,419.20 over the life of the loan.

Conclusion

Changes in APR can cost us money.  If the changes are small, so will their affect on us.  But if inflation picks up and the interest rates start to jump by whole points, you'll see that these calculators show an entirely different result.  But for now, talk and borrowing money is relatively cheap.