Borrowing

Interest rates are at zero again for the first time since 2015 — here's what you need to know

Twenty/20

On Sunday, the Fed cut rates to about zero, down from about 1%, and launched a $700 billion quantitative easing program to help protect the U.S. economy from the effects of the coronavirus outbreak. Quantitative easing is when the U.S. government buys a predetermined amount of government bonds or other financial assets in an effort to pump money into the economy.

The Fed's decision comes less than two weeks after the Fed issued a different emergency cut, which had dropped rates to a range of 1%-1.25%. Rates are now targeted at 0%-0.25%, which makes it cheaper for businesses and consumers to borrow money.

The good news, for consumers, is that lower rates can open up opportunities for saving.

How consumers can take advantage of low rates

For consumers, lower rates can mean it's a good time to make a big purchase or to refinance existing debt. If you have a mortgage or a large student loan balance, for instance, now is definitely the time to start looking at your refinancing options.

The right moves can potentially save you thousands of dollars in coming years: A borrower with $30,000 in student loan debt and paying around 10% interest could stand to save almost $9,000 in interest over 10 years by refinancing to a loan with a 5% rate, for example.

"I see people who are financially savvy taking advantage of lower rates," says Amy Shepard, an Arizona-based financial advisor. Shepard says that typically, in a low-rate environment, people will rush to refinance large debts, like mortgages or student loan balances, but consumers can also look at refinancing auto loans or credit card debt.

You could also consider making a significant purchase, like a car, since you might be able to better afford one if you can get an auto loan at a new lower rate.

While the state of the markets that partly inspired these rate cuts has many people concerned about the economy, remember that volatility also opens up opportunities for investors to buy stocks at cheaper prices. If you're a long-term investor, you can get a great deal. That's why experts recommend you keep investing despite the turmoil.

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Why the Fed is cutting rates

This is only the second time that rates have hit zero. The last time they did was in 2008 as the Fed attempted to mitigate the effects of the Great Recession, and rates remained at that level until late 2015. The latest rate cut and the announced quantitative easing program appears to be the largest single-day set of moves the Fed has ever taken.

Many experts were anticipating that the Fed would cut rates to zero, given that the stock market has slipped into a bear market. "The Fed is dusting off the financial crisis playbook," says Greg McBride, chief financial analyst at Bankrate.

Experts hope that these rate cuts, along with the $700 billion quantitative easing program — under which the Fed will purchase $500 billion in Treasurys and $200 billion in mortgage-backed securities, in effect stimulating the economy by increasing the money supply — will help keep the economy from a significant slowdown.

If, since it's cheaper to borrow money, enough people take out loans to make big-ticket purchases like homes, cars, or a large appliance, the economy has a better chance of staying strong. 

Again, though the markets are in a state of flux, the key thing to remember is that short-term turbulence can be a good opportunity to buy stocks at lower prices. Stick to some of the tips for beginner investors, which are sound no matter how long you've been investing.

"Think to the future, beyond the economic pause and when business and life resumes normalcy," McBride says. "Thinking five, 10 years down the road could prevent that regrettable knee-jerk selling reaction and reveal potential buying opportunities."

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