When interest rates go up, recheck your credit and cash strategy

With the sudden resurgence of interest rates, it’s no surprise that Stacy Pedersen, senior lead wealth custom lending specialist, Wells Fargo Wealth & Investment Management, is hearing more often from clients about interest rates. After all, it has been about 16 years since the Federal Reserve raised interest rates this quickly. Here are the top two questions that she are her colleagues are hearing:

1. How fast will rates rise?
2. How will that affect my particular debt and leverage situation?

Pedersen answers the “how fast” question by referring to the analysis and forecasts from the Wells Fargo Investment Institute’s team of economists. “They have been putting out a lot of great reports around interest rate risk and interest rate projections,” she says. “As a lending specialist, I rely on those same sources.”

To answer the question about the impact of rising rates, she suggests digging deeper with the help of your wealth team in these three areas:

1. What is my need for credit?

Credit, of course, can be used short term or long term. One short-term use might be bridging a gap when cash flow from a business or other income is seasonal. A long-term use might be purchasing an asset you intend to hold for a long time, such as real estate.

“Consider your need and the appropriate type of credit to address it, maybe a line of credit or a term loan,” Pedersen says.

2. What is my timing?

Timing determines whether you might choose fixed interest or floating interest. “Rates are still good. If your time horizon is longer — if the debt is going to be out three, five, seven, or 10 years — then I still think we’re in a period in which it’s OK to choose a fixed rate,” Pedersen says. “I would do that probably sooner rather than later considering we already have a trajectory of rising interest rates.”

3. Does my cash-flow strategy match my repayment needs?

Here’s where a team effort may give you clarity and confidence. “I always say that your custom banker should be working in tandem with your financial advisor and your investment manager,” Pedersen says.

Once you’ve pulled together your team, you’ll need them to sharpen their pencils, so to speak. “There are some math calculations they can do,” Pedersen continues. “They can project out what your variable interest payments may be over 12 to 24 months, making some assumptions, and what your investment return might be over the same 12 to 24 months.” Those calculations can help you determine whether there’s a particular interest rate at which agreeing to a loan doesn’t make sense for your situation.

Having a solid plan in place is key. Your quarterly review with your wealth team is a great time to make sure that your cash management strategy matches your needs.

Advantages of a blended strategy

 “Using credit doesn’t have to be all or nothing,” Pedersen says. You can have many different types of credit, different lengths of credit, and different repayment and interest terms across your whole financial picture. “We dollar cost average into investments — and a person can dollar cost average in and out of debt as well. You can have a plan that says, ‘It makes sense for me to have this short-term line at this interest rate, but I’m going to start to strategically repay that, or strategically draw that, depending on where interest rates are.’”

Pedersen also points out that interest rates are not the only aspect to look at when it comes to credit and leverage. “You have to be mindful of interest rates, but it’s still relevant to use lines of credit to pay certain expenses. Leverage can help prevent you from having to liquidate an investment you want to hold. It may make sense for your personal plan to lean into leverage, even though the rates are changing,” she explains. “If you are only asking, ‘What is the interest rate doing?’ you’re not looking at the whole contribution that leverage can make to your balance sheet.”