If you’re looking to consolidate debt or finance a home improvement project, now may be a great time to lock in your interest rate on a personal loan.
The cost to finance a personal loan hasn’t changed much since the start of the year, but rates this month fell to their 2016 low.
In Bankrate’s national survey of interest rates for April 13, 2016, the rate on personal loans declined to 11.27% from 11.37%. A year ago, it was 11.13%, so rates have remained relatively flat the last 52 weeks.
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Borrowers with strong credit might still see offers with the lowest personal loan interest rates ever, says Greg McBride, CFA, chief financial analyst at Bankrate.com. But with the Federal Reserve poised to boost short-term interest rates later this year, personal loans could soon become more expensive.
“This is not an environment where you’re going to see personal loan (rates) make any wholesale moves lower,” McBride says. “We’ve already had 1 interest rate hike from the Fed, and we’ll get more sooner or later.”
Borrowers with damaged credit may be the first to experience rate hikes, McBride says, particularly from marketplace lenders who are facing increased investor demand for higher returns.
For borrowers with strong credit, personal loans are among the cheapest financing options available. But taking out a loan doesn’t always make sense.
“It’s not a good idea to use personal loans or any borrowing for consumption items. That’s big screen TVs, vacations, things like that,” McBride says. “Home improvement projects, things that either add to your enjoyment of the home or its future marketability, can offer some return on investment.”
The No. 1 reason why borrowers seek a personal loan at many lenders is to consolidate debt. At Avant, a Chicago-based marketplace lender, 55% of its customers take out loans for that purpose. Debt consolidation also accounts for a majority of loans at Prosper Marketplace in San Francisco.
“Other popular categories include home improvement, household expenses and medical expenses,” Sarah Cain, Prosper’s head of communications, writes in an email. “Interestingly, Prosper saw home improvement loans double in 2015.”
Todd Nelson, business development officer for LightStream, the online lending arm of SunTrust Bank in Atlanta, says more borrowers now are willing to use a personal loan for home improvements because the housing crash highlighted “the downside of taking money out of their house. They’re less willing to do so.”
Borrowers with excellent credit also may qualify for personal loan rates that are lower than most home equity products, Nelson says.
But competitive interest rates aren’t the only advantage personal loans have over other types of financing.
Cain calls personal loans “transparent” because the rates are fixed over a specific period of time, so you’ll know when you borrow what your monthly payments will be until the loan is paid off. Personal loans also are unsecured, so there’s no collateral required.
That, and they’re convenient, too.
“There’s no appraisal and no lengthy closing process as there could be taking a home equity loan,” McBride says. “With a personal loan, the money can be in your account within a matter of days.”