Low Interest Rates Put Cash in Americans' Pockets

March 28, 2012

A historic drop in interest rates is helping save U.S. households more than $3,000 a year on average, allowing consumers to spend more even as their earnings fall, according to a USA Today analysis.

  • Americans spent 5.8 percent of their after-tax income paying interest on mortgages, credit cards, car loans and other debt, according to the latest data from the Bureau of Economic Analysis.
  • That's the smallest share since 1977 and a steep drop from a record high of 9.1 percent in 2007.

The result: Low interest rates are reshaping household budgets and consumer spending, showing the economic force of the Federal Reserve's unprecedented effort to reduce mortgage and other long-term rates to restore an economy that was near collapse four years ago.

  • Household interest payments fell to an average of $469 per month at the end of last year, down from a peak of $728 in 2007, after adjusting for inflation.
  • That equals $3,100 a year.

Three-fourths of the interest savings stem from falling rates, the rest from a reduction in debt.

  • Mortgage interest payments are down 30 percent from their 2007 peak.
  • Interest payments on other debt, such as credit cards and car loans, are down 50 percent.

Interest savings have softened the blow of falling personal income, which is $1,700 lower per household than at the 2007 peak.  The gains are even greater for businesses, which "depend more on borrowing," says Robert McTeer, former president of the Federal Reserve Bank of Dallas and distinguished fellow with the National Center for Policy Analysis.

The big downside: falling rates hurt those who saved prudently while others spent and borrowed.  And some borrowers still face crushing mortgages on homes that lost much of their value.

Source: Dennis Cauchon, "Low Interest Rates Put Cash in Americans' Pockets," USA Today, March 27, 2012.

For text:

http://www.usatoday.com/money/economy/story/2012-03-26/interest-rates-falling/53793162/1

 

Browse more articles on Economic Issues