How Rising Personal Loan Interest Rates Will Impact Borrowers

Interest rates on personal loans are rising, reaching the highest rate since the coronavirus pandemic. While existing borrowers with fixed rate loans will not be affected, those with variable rates may already have their rates increased. In addition, new loans will be more expensive than at the beginning of the year.

Key Takeaways

  • Borrowing costs using a personal loan have risen to pre-pandemic levels in 2022.
  • Some existing personal loans may be affected, but new borrowers will mostly bear the burden of increased costs.
  • Borrowers should carefully consider borrowing costs and shop around before applying for a loan.

Why are personal loan interest rates rising?

According to data from the Federal Reserve System, the average interest rate for a two-year personal loan reached 10.16% in the third quarter of 2022. That’s up from the pandemic-era low of 8.73% in the previous quarter. This is also the first time the average has exceeded 10% since 2019, when it reached 10.32%.

The main reason for the rise in interest rates is the Federal Reserve’s decision to raise the federal funds rate at six consecutive committee meetings in 2022 to try to combat 40-year high inflation. While this rate does not directly affect personal loan rates, it does have an impact on the prime rate, the benchmark that lenders use to set their interest rates.

But personal loan rates have not risen at the same pace as the federal funds rate, in part because of strong consumer demand, fueling competition among lenders to keep rates low. However, borrowers can expect borrowing costs to continue to rise as long as the Federal Reserve continues its rate hike policy.

How will borrowers be affected?

Most personal loans have fixed interest rates that do not change during the term of the loan. Borrowers with fixed rate personal loans will not have their borrowing costs affected.

However, for borrowers with variable rate loans, which are less common, the interest rate and therefore the monthly payment may increase. Borrowers should review their loan agreement or contact their lender to understand how often their rate will change and whether there are limits on rate increases.

However, the impact of rising rates will be on new borrowers. Whether you’re borrowing money to consolidate debt, make home improvements, or pay for other big expenses, you can expect to pay more.

Should you apply for a personal loan?

If you’re thinking about applying for a personal loan, carefully consider your reasons for borrowing and whether you can comfortably afford the monthly payment.

If you plan to use the loan to improve your financial situation, such as debt consolidation or to cover an emergency, it may still be worth it despite the higher rates. But if you’re considering taking out a loan to pay for a vacation or something else that isn’t urgent, it’s better to wait for lower rates.

If you’ve decided a personal loan is right for you, take the time to shop around and compare several lenders, looking at interest rates, origination fees, repayment terms and other factors. If your rate is high, consider improving your credit or applying with a co-signer or joint applicant to potentially secure better terms.

Source

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