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Future shock: Could 'normal' interest rates derail your finances?

June 11, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Mortgage rates and certain other interest rates have been headed higher lately on signs that the economy may be getting stronger. What if this continued? What would a return to normal interest rates look like?

MoneyRates.com ran some calculations on how a return to historically normal interest rates would translate to dollars and cents. But you may want to brace yourself: After such a long period of abnormally low interest rates, you might not recognize a world with normal interest rates.

The following are four examples of how a return to normal interest rates could affect personal finances. The first two may seem relatively mild, but the last two could make quite an impact.

1. Auto loans

Four-year auto loans were recently at 4.69 percent, but over the past 40 years they've averaged 9.86 percent. At 4.69 percent, a $25,000 four-year loan would give you a monthly payment of $572.23. At the long-term average of 9.86 percent, the same loan would require a monthly payment of $632.39. If you could only afford a payment of around $572, you'd have to lower your sights to a car you could get for around $22,650.

2. Credit card rates

The Federal Reserve reports that credit card rates recently averaged 13.01 percent. Historical rates on credit cards are not available as far back as they are for auto loans, but they do go back to late 1994. Since then, credit card rates have averaged 14.33 percent. If credit card rates returned to that level, it would cost you an extra $132 a year in annual interest on a $10,000 balance.

3. Mortgage rates

Current mortgage rates recently rose to 3.81 percent, but even though this is a bit higher than they've been over the past year, mortgage rates are still much lower than the average of 8.69 percent over the past 40 years. Because a 30-year loan involves paying interest over a very long period of time, the effect of a change in interest rates is especially pronounced.

At current mortgage rates, a $200,000 loan would result in a monthly payment of $933.05. Raise the interest rate to the historical average of 8.69 percent, and that payment jumps to $1,564.84. If you needed to keep the payment around that $933 level, you'd have to settle for a loan of $119,250.

4. Savings accounts

The good news is that short-term bank rates would benefit from a return to historical norms. Short-term bank rates have averaged 5.86 percent over the past 40 years, but recently were down to 0.18 percent. That means currently, you'd be earning just $180 a year on a $100,000 deposit. A return to the historical average would boost that interest to $5,860.

There is a great distance to cover between where rates are now and where they have been historically, and they may not bounce all the way back to their long-term averages. Still, even if they go part of the way between here and there, it could be far enough to create big changes.

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