How to manage cash vs. borrowing when interest rates rise

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Concerned about cash flow? Here’s what to consider during market uncertainty and rising interest rates.

We all use credit in our daily lives, whether it’s to optimize cash flow, create tax efficiencies, or make purchases. But with interest rates rising, now could be the time to also 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, now could be the time to evaluate,” Singsank says. One option could be to refinance an adjustable-rate loan into a longer-term fixed rate loan.

Whatever you decide, timing can be critical. Your investment planners can help you decide whether to wait or act now on financing or liquidating assets to potentially save you money.

Discuss credit and liquidity needs with your advisors

“Be proactive when interest rates change,” says Singsank. “Consider reviewing your wealth plan and related credit and liquidity needs with your banker, advisor, 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 prefer using cash reserves instead of securities to gain liquidity, or both?
  4. Based on your current 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 existing variable interest payments in a rising-rate environment? If not, it’s a good time to evaluate refinancing or consider fixed-rate strategies.
  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.”

Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.

Securities-based lending has special risks and is not appropriate for everyone. If the market value of pledged securities declines below required levels, you may be required to pay down the line of credit or pledge additional eligible securities in order to maintain it, or the lender may require the sale of some or all of your pledged securities. The sale of pledged securities may cause you to suffer adverse tax consequences. You should discuss the tax implications of pledging securities as collateral with a tax advisor. Wells Fargo Bank, N.A. and its affiliates are not tax or legal advisors. All securities and accounts are subject to eligibility requirements. You should read all lines of credit documents carefully. The proceeds from some asset-backed lines of credit may not be used to purchase additional securities or pay down margin. Securities held in a retirement account cannot be used as collateral to obtain a loan. Securities purchased in the pledge account must meet collateral eligibility requirements.

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