Shepherd Outsourcing opened its doors in 2021, and has been providing great services to the ARM industry ever since.
About
Address
©2024 by Shepherd Outsourcing.
Debt can feel like a constant weight on your shoulders, especially when interest rates are on the rise. As of the first quarter of 2025, Americans’ credit card debt reached $1.182 trillion, highlighting the ongoing struggle many face.
With the Federal Reserve increasing rates, the cost of borrowing is only going up, making it harder to pay down existing debt.
This blog will break down how rising interest rates impact your debt, why paying only the minimum isn’t enough, and what steps you can take to regain control and manage your finances more effectively.
At a Glance:
Interest is not just a cost, it’s a multiplier. As rates increase, the total you owe can grow even if you’re not borrowing more. This section explains how interest works, which types of loans are most affected, and why certain repayment habits can quietly increase your debt over time.
Interest is the fee charged for borrowing money. It’s typically calculated in one of two ways:
a) Simple interest
Simple interest is based only on the original loan amount (principal). It is commonly used in personal loans, car loans, and some student loans, where interest is calculated only on the original loan amount.
For example, if you borrow $5,000 at 10% simple interest for 3 years, the total interest will be $1,500.
b) Compound interest
Compound interest is applied not just to the principal but also to any unpaid interest. This increases the total amount owed each period and is the standard method used in credit cards and personal loans.
For example, a $5,000 credit card balance at 22% APR, paid off slowly with minimum payments, can result in paying more than $10,000 over time. The longer the debt is carried, the more compounding inflates the cost.
Loans and credit products can either have a fixed or variable interest rate.
a) Fixed-rate debt
Fixed-rate debt stays the same throughout the term of the loan. This provides predictable payments and is common in personal loans or certain student loans.
For example, a 5-year personal loan with a fixed interest rate of 7% means your monthly payments will stay consistent for the entire duration of the loan, regardless of market fluctuations.
b) Variable-rate debt
Variable-rate debt changes with market conditions. These fluctuations directly affect your monthly payments and the total interest paid. Credit cards, private student loans, and adjustable-rate mortgages often fall into this category.
For example, a 2% rate increase on a $300,000 adjustable-rate mortgage can raise monthly payments by around $400, adding over $100,000 in extra interest over the loan term. These increases happen without new borrowing; market changes beyond your control trigger them.
Minimum payments are structured to cover interest first, with a small portion going toward your principal. Over time, this slows your progress and increases the amount paid overall.
For instance, with a $10,000 credit card balance at 22% APR, making only minimum payments could result in more than $13,000 in interest before the debt is fully repaid.
This approach keeps balances high for longer, especially as interest continues to accrue each billing cycle.
Rising interest rates affect both personal and institutional debt. Governments facing higher borrowing costs adjust by refinancing, restructuring, or changing their debt mix to reduce exposure.
You can also apply similar principles:
Managing your interest exposure early can reduce long-term costs and prevent unnecessary financial strain.
Also Read: Debt Consolidation Loan Strategies for Poor Credit
Some debts are more sensitive to interest rate changes than others. If your loan has a variable rate or a high APR, rising rates can sharply increase your monthly payments. Here's where the impact shows up first.
Credit cards often have variable APRs with no legal cap. When the Federal Reserve raises rates, card issuers usually pass the cost to consumers immediately.
What to do: Pay more than the minimum. Consolidate or request a lower rate where possible.
Most personal loans have fixed interest rates, but new loans issued during high-rate periods come with higher costs.
What to do: If you're planning to borrow, wait if possible. If you already have a high-rate loan, check if refinancing is viable.
If you refinanced during low-rate years, you’re likely locked into better terms. But those with variable private loans may now face rising monthly costs.
What to do: Check your loan type. If rates are rising and you have a variable private loan, consider switching to a fixed-rate option.
Homeowners with fixed-rate mortgages see stable payments, but those with adjustable-rate mortgages or home equity loans face increased monthly payments as interest rates increase.
What to do: If you're considering refinancing, act before rates increase further. Fixed-rate mortgages offer more stability in volatile markets.
Rising rates have already made borrowing more expensive, and most projections suggest they won’t fall significantly in the near term. Here's what you need to know:
Overall, new borrowing is more expensive, and refinancing options have narrowed for many borrowers.
High interest rates can keep you in debt longer than expected, but the right steps can reduce your costs and shorten your repayment timeline. Here are five strategies to take control.
Minimum payments mostly cover interest, not the actual debt. Paying extra helps you cut down the balance faster and reduce total interest paid.
Combining multiple debts into one with a lower rate can simplify repayment and reduce interest, but only if the new rate is actually lower.
Just like governments refinance high-cost debt into cheaper bonds, you can do the same to manage personal debt. Shepherd Outsourcing can help you assess if consolidation is right for you and provide effective solutions to help you pay off your debt.
This method reduces total interest by targeting the most expensive debt first while making minimum payments on the rest.
How it works:
Many lenders are open to rate reductions, especially if you have a strong payment history.
How to ask: “I’ve been making regular payments and wanted to ask if I qualify for a lower APR.”
When interest rates are high, new borrowing can cost more than expected.
If managing debt is becoming unmanageable or you’re seeing little progress despite your efforts, it may be time to consider professional assistance. Here are some signs to look for.
Shepherd Outsourcing helps individuals manage and reduce their debt through custom debt management plans. We assist individuals with debts such as home loans, bank loans, and personal loans, helping them clear their obligations and manage their finances effectively.
We offer debt consolidation services and provide ongoing support to help you stay on track with your financial goals. Our team ensures you're equipped with practical solutions to handle your debt in a way that fits your situation.
Interest can quickly escalate your debt, especially with variable rates and high APRs. Even small changes, like paying more than the minimum or prioritizing high-interest debts, can help reduce the long-term impact.
Taking action now is far more effective than avoiding the issue. If managing debt feels overwhelming, Shepherd Outsourcing is here to help with tailored solutions and ongoing support to guide you through the process.
Don’t overwhelm yourself anymore. Contact us today to make measurable actions now!
A: Debt is the amount of money borrowed that must be repaid, often with additional costs, such as interest. Interest is the fee charged for borrowing money, typically expressed as a percentage of the principal amount, added to the total owed.
A: Interest increases the total amount you owe over time. With compound interest, you pay interest on the original loan amount and any accrued interest, making it harder to pay off your debt. As interest rates rise, so does the cost of managing and repaying your debt.
A: To avoid interest, aim to pay off your balances in full each month. For credit cards, this means paying the entire balance before the due date. If that's not possible, consider consolidating or refinancing to secure a lower rate.
A: Paying interest on debt with more debt can become a cycle for individuals when they borrow to cover existing obligations. This practice is common with credit cards and payday loans. In business, it’s not sustainable unless debt is used as a strategic tool to generate returns, which is uncommon in other industries. For individuals, this method often leads to financial stress rather than growth.
A: The most effective way to eliminate debt is to pay extra towards the principal. This reduces the total balance faster and cuts down the amount of interest you’ll pay over time. Focus on high-interest debt first for the biggest impact.
©2024 by Shepherd Outsourcing.