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How to take advantage of low interest rates so you can work towards buying a car or a home

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For some people, there is a silver lining to the coronavirus pandemic: It's really cheap to borrow money. 

The Fed, bracing for the economic fallout of the pandemic, dropped interest rates to zero in the middle of March — the first time rates had hit zero since 2015. The Fed has also signaled that it doesn't plan on raising rates again until the U.S. reaches full employment, which could take years.

In other words, it should be cheap to borrow for some time, and that's good news if you want to want to work towards buying a car or a home in the relatively near future rather than trying to rush and get one now. 

Generally, low rates lead to an uptick in big purchases, like a house or a car, or in the numbers of people who refinance a big recent purchase. Many Americans have started making those purchases over the past couple of months: Mortgage applications are up 21% from a year ago, and auto sales are also rebounding as shoppers are able to return to dealerships following business lockdowns in many states.

And there are deals to be found. The average interest rate on a 30-year fixed-rate mortgage is currently 3.13%, down from 3.84% a year ago, according to data from Freddie Mac. For auto loans, the average interest rate for a 60-month loan for a new car is 4.32%, according to Bankrate, which is down from well over 5% a year ago. Over the life of a loan, those lower rates can add up to thousands of dollars in savings.

Still, experts say, it's best not to hurry. Given that rates aren't going up any time soon, you'll still have time to shop around for a good deal, and you can use this time to put yourself in a better financial position. 

Here are a couple of smart money moves you can make now that can help you prepare to buy a car or a home down the road.

Get your credit in order

One of the best things you can do ahead of a big purchase is priming your credit score, which is key to qualifying for the best available rates. Three simple things you can do to improve your score include checking your credit report for errors, paying your bills on time, and keeping your credit card balance well below your credit limit.

Having a great score doesn't just mean you'll get a great rate. It may be your ticket to even being offered a loan:

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The pandemic has meant many mortgage lenders are increasing their credit score requirements to protect themselves. Low rates have also caused many lenders, including banks, to experience a decline in revenue, and as a result, have "become more strategic" with their lending, says Jacqui Kearns, the chief brand officer at New Jersey-based Affinity Federal Credit Union, who also leads the company's financial education initiatives.

Once your score is in the best possible shape, shop around or get prequalified for a mortgage or auto loan. Taking your time do do this before you're ready to buy may actually help you find a lower rate and better loan terms. In San Francisco, for example, mortgage borrowers who shopped around saved as much as $500 a month, according to a 2019 Zillow analysis.

'It's time to consider an online savings account'

Don't be tempted to put, or keep, money you intend to use for a short-term goal in the market. "People should continue to keep their emergency cash, or money they are using for a large purchase in the near future, in savings," says Thomas Rindahl, a financial advisor at TruWest Wealth Management Services in Scottsdale, Arizona. 

The benefit is that you'll have that cash on hand when you need it for your purchase, without needing to worry that short-term market volatility will dramatically affect how much of a down payment you can put down or how much house you can afford.

Safety comes at a cost: While low interest rates are generally good for borrowers, they tend to punish savers. 

"It's time to consider an online savings account," says Randy Bruns, a certified financial planner and founder of the Illinois-based financial firm Model Wealth. Bruns says that online banks usually offer better rates for savers than large, brick-and-mortar banks, which he says generally "haven't been competitive with online savings accounts."

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As of June, some of the best-available rates are 1.35% for an online, high-yield savings account, according to tracking data from Bankrate. Aside from rate-shopping, savers can look for other places to put their money, like CDs, which offer higher rates.

For now, the most important and pertinent thing you can do is to keep your goals in mind. Don't make any sudden or emotional spending decisions and do what you can to protect or preserve your savings.

"It's your money," says Kearns. And whether you're borrowing or looking for a better rate for your savings, she says, "be vigilant, and get the most that you can."

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