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The essay discusses the ways in which investors, businesses, and individuals can prepare for the future rise in interest rate. More specifically, the paper looks at the strategies that borrowers and savers can accommodate to ensure that they mitigate losses and benefit and when the interest rate rises respectively.
Market watchers predict an inevitable upsurge in interest rates because of the shaky world financial markets. Rising interest rates will benefit savers because they will get higher returns from their savings. Contrary, the borrowers will have to bear high monthly repayments. Both savers and borrowers can prepare in many ways to take the advantage of the high-interest rates and minimize losses respectively (“Preparing for Rising Interest Rates,” 2013).
First, the borrowers need to reexamine their cash flow position. The rising interest rates mean that the borrowers will have to part with more cash flow every month. Therefore, if an investor has excess cash flow, he or she should consider savings as an alternative strategy. Businesses should assess their cash flow projections in the future. Also, examine the existing repayment schedule of the existing debt. Additionally, examine their customers’ ability to pay the debts on time for the services rendered. The move may call for debt renegotiation with the customers to avoid future pitfalls (“Preparing for Rising Interest Rates,” 2013).
Secondly, businesses should prioritize refinancing. Refinancing minimizes business losses in two ways. First, the losses for the debt holders who experience the rise in interest rates. Secondly, the losses for the lenders arising from the clients fail to make repayments on time. Refinancing may call for debt renegotiation with the clients. Additionally, business should consider taking extra loans to finance their long-term projects when the rates are still low. If the business has short-term loans, it should make it a priority to clear it in full to improve its credit score rating. The move would make the business eligible for long-term loans at a favorable rate. However, the business should be very careful with the opportunistic behavior of lenders who strike loan deals to win business when the borrowers struggle to repay (Doffing, 2015).
Thirdly, the business and individuals should embark on loan overpayments. Depending on the available cash flow, overpayment of loan can reduce the loan burden when the rate rises. An overpayment is the best option than excessive saving because the loan has a higher interest rate than saving in most cases. Therefore, reducing or even clearing debt should be a priority before the rate rises (“Preparing for Rising Interest Rates,” 2013).
Furthermore, individuals and businesses should reduce their current spending and invest in bonds, electronically traded funds (EFT’s) because they have a short maturity period and high returns over a short time. Moreover, savings should be a priority during this time. For bond investment, the investors should consider holding them to maturity. Holding bond cushions the investor from loss of its face value. Therefore, they should be content with the coupon payments (“Preparing for Rising Interest Rates,” 2013).
Lastly, the credit cardholders should ensure that they make their monthly payments on time to avoid fees and penalties. Moreover, the holders should start paying more each month to cushion themselves from losses when the interest rate rises. The holders should tighten their budget and pay the credit card with the savings (Doffing, 2015).
In conclusion, the predicted future rise in interest rate should not worry investors, businesses, and individuals because they can capitalize on refinancing strategies, loan overpayment, more savings, investing in short-term bonds, and updating their credit cards payments to remain financially strong.
References
Doffing, M. (2015). Nowhere to go but Up. North Western Financial Review, 200(3), 16-19.
Preparing for Rising Interest Rates. (2013). Retrieved June 9, 2016, from https://www.ml.com/publish/content/application/pdf/GWMOL/ARC64BF0.pdf
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