Preparing Your Loan Portfolio for 2023
By: David Halverson March 20, 2023There’s perhaps no better word for the interest rate market in 2022 than tumultuous. Thanks to the highest inflation readings in over 40 years and one of the most aggressive Fed rate hike campaigns ever, market rates skyrocketed through much of the year. However, as year-end approaches, mortgages, Treasuries and other rates have actually begun to fall. If you’re looking to take out a loan of any kind, what does this mean for you as 2023 approaches? Here are the most important factors you should consider when preparing your loan portfolio.
Inflation Is Falling
There’s no denying that inflation remains stubbornly high at the end of 2022. The most recent CPI reading, in Oct. 2022, reflected a 7.7% year-over-year increase in consumer prices, [2] which is still one of the highest rates since the early 1980s. But the trend in prices is more important than the absolute number, and that 7.7% increase is a marked improvement over the 9.1% inflation rate posted in June 2022. [1]
Although this means that consumer prices are still going up, tightening household budgets across the country, from a financing perspective, this is all good news. For starters, it means that rates will likely continue to trend down going forward, more or less tracking inflation. This is good news for any future borrowings. But it also means that if you currently have high-interest debt, you’ll likely be able to refinance that debt at lower rates in the near future.
The Fed Is Slowing Its Pace of Raising Interest Rates
In response to slowing inflation, the Fed has indicated that it is going to slow its pace of raising interest rates. Even better, it likely means that rate hikes will stop in 2023, potentially early in the year. As the market tends to anticipate these types of actions, it likely means that rates may potentially continue to fall even before the Fed is done raising rates.
Longer-Term Rates Are Lower Than Shorter-Term Rates
In normal markets, long-term rates are higher than short-term rates. This is because it is generally riskier to hold debt for a longer period of time, for a number of reasons. But as of Dec. 2022, short-term rates are much higher than long-term rates. This is known as an “inverted” yield curve, and it often – but not always – predicts a coming recession.
But what does this mean for you as a borrower? It can actually offer an opportunity. If you extend the maturity on your loan, you can snag a lower interest rate than you might normally expect from the market. If rates fall, as the market seems to be suggesting, you can refinance your loan at an even lower rate. But if rates actually stay high or go higher, you have locked in a long-term loan at what may seem like a low rate in the future.
This is a simplistic analysis of the situation, and there are other variables that you should take into account as well. For example, if you take out a long-term loan, you’ll be paying interest longer as well, which may not be the best whether you’re an individual or a business. Be sure to speak with a personal loan expert to make the right choice for you.
There May Be a Recession
A recession is a bit of a double-edged sword for consumers and businesses looking to take out loans.
On the one hand, a recession typically drags down interest rates, making all types of loans more affordable. This provides more flexibility when it comes to financing and makes more room in the budget for other things.
On the other hand, a recession can also bring risk. For individuals, a slowing economy increases the risk of job loss or reduced pay. For companies, tightening economic conditions typically lead to lower sales and profits. Both of these scenarios reduce cash flow, making it harder to make debt payments.
There are all types of recessions – short ones, long ones, mild ones and severe ones – and no one can predict how bad a recession might be with any accuracy. If a recession seems to be imminent – as may be the case as 2023 approaches – it’s a prudent move to sit down with a financing expert to explore all of your options.
About the Author
David Halverson
With over 10 years of direct experience in the lending space, Lendzi’s leaders have established over 60 partnerships with top lending institutions and have overseen an excess of $500 million raised for entrepreneurs across America.