How Business Owners Should Navigate the Fed Rate Cut
Audio version available here (1 min. 50 sec.)
With the Federal Reserve finally lowering interest rates by 0.5% yesterday, many business owners wonder what action they should take now that borrowing is cheaper. However, it’s important to know what exactly the Fed’s rate drop means for those who borrow money or plan to.
Your first thought might be to take advantage of the lower rate to refinance an existing loan or to take out one you had been putting off due to decade-high rates. Even if you ask an AI like ChatGPT, it purports that now is a “good time to refinance existing debts, acquire new loans for expansion, or invest in capital expenditures”. But this is inaccurate, and a word of caution for business owners who rely on programs like ChatGPT for financial advising.
Let’s take a look at how much a rate drop of 0.5% would really benefit you if you decide to take out a loan based on that advice. For car loans, the current average rates are 7.1% for new cars and 11.3% on used cars. A drop of 0.5% on a typical $35,000 loan will only save you about $8 a month, which is less than $100 a year. If you have credit card debt, you are likely accruing a lot of interest since credit cards currently average a rate of just under 21%. Our best advice is to pay off your credit cards in a timely manner to escape these extra charges and recover your cash flow.
Other ventures like purchasing a house have become more viable in recent weeks as mortgage rates steadily decrease from last year’s peak of nearly 8%. In fact, there has been a rise in refinancing as rates go down to the lower 6% range. Still, like credit cards, a rate this high can cost you thousands of dollars on top of your original loan. Further into 2024 and 2025, this might change as further rate drops are implemented, so it may be best to keep an eye on the news for a better opportunity.
The Fed’s rate cut has been huge news for all Americans, but business owners especially need to be aware of the latest moves that could significantly impact their business’s cash flow. For further business updates and tax tips, make sure to follow the XQ CPA blog and social media. For more advanced financial advising, reach out to XQ CPA’s experts by phone or the link below.
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