How to manage cash vs. borrowing when interest rates rise

We all use credit in our daily lives, whether it’s to help optimize cash flow, create tax efficiencies, or make purchases. A rising-interest-rate environment could be a good time to take a closer look at liquidity strategies and other forms of borrowing.

Using cash versus borrowing

It could make sense to pay cash instead of borrowing in some instances. Let’s say you have a fair amount of cash and are not planning to invest it in the market. That could be a good solution for buying a car or a house, paying for a child’s education, or expanding a business.

Amid higher interest rates, paying cash could be a better option than securing a long-term loan to buy a costly item.

“Increased rates may also impact purchasing power for bigger-ticket items (such as homes, boats and airplanes) traditionally financed over longer periods,” says Brian Singsank, senior lead wealth custom lending specialist, Wells Fargo Wealth & Investment Management. “It’s important to evaluate your balance sheet and wealth plan to make sure they are aligned to help meet upcoming liquidity needs.”

Also, if you have an existing variable-rate loan, such as an adjustable-rate mortgage or line of credit, that rate could go up, resulting in higher interest costs.

“If it’s still a long-term funding need, when interest rates are rising could be the time to evaluate,” Singsank says.

Whatever you decide, timing can be critical. Your investment planners can help you decide on what is best for your current situation.

Discuss credit and liquidity needs with your advisers

“Be proactive when interest rates change,” says Singsank. “Consider reviewing your wealth plan and related credit and liquidity needs with your banker, adviser, your CPA and even an estate-planning specialist.”

Singsank recommends starting those conversations by sharing your answers to these basic questions:

1. How much in assets would you be willing to liquidate and why?
2. Are you debt-averse?
3. Would you consider alternatives to liquidating your current cash reserves in order to meet your financial needs?
4. Based on your balance-sheet leverage, what is your exposure to rising interest rates?
5. Are you comfortable with the amount you’re paying or may have to pay to service your variable interest payments in a rising-rate environment?
6. As part of working toward your financial goals, do you anticipate upcoming borrowing or liquidity needs?

“Once you’ve answered these questions,” says Singsank, “you should better understand whether you need to make changes to your wealth plan, including liquidity and other borrowing strategies, to help meet your financial goals.”

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