To combat record-breaking inflation, the Federal Reserve raised interest rates by 0.75 of a percentage point at today’s Federal Open Market Committee meeting. This is the fourth rate hike so far this year. Experts expect federal interest rates to reach 3.4 percent by the end of 2022. These rate hikes will likely impact the interest rates offered by personal loan lenders.
Most personal loans have fixed rates, so current borrowers do not need to worry about their interest rates changing. Borrowers in the market for a personal loan should prepare for rising interest rates, but there are things you can do to mitigate those costs.
“Rising interest rates aren’t good news for those in the market to borrow,” says Greg McBride, Bankrate’s chief financial analyst. “But borrowers with strong credit will continue to find very competitive terms even in the face of another large Fed rate hike. It is important to compare different lenders to get the best deal.”
Will the Fed rate hike affect existing personal loans?
Most personal loans are fixed-rate loans, meaning that the interest rate you pay does not change over the life of your loan. Borrowers with a fixed-rate personal loan will not see changes to their interest rate or monthly payments.
When you receive a fixed-rate loan, you lock in an interest rate. No matter what the market conditions are, your interest rate should remain unchanged and the overall cost of your loan unaffected. However, some lenders do offer variable-rate personal loans.
Borrowers with a variable rate personal loan may see their interest rate increase with the federal rate. It may be worth considering transferring your current balance to a fixed rate debt consolidation loan if you have a variable rate loan.
How will the Fed rate hike affect new personal loan borrowers?
The federal interest rate set by the Fed does influence the prime interest rates lenders offer to new borrowers. The average personal loan interest rate was 10.28 percent at the beginning of 2022 and has risen steadily throughout the year. As the Fed has introduced several rate hikes, the average personal loan rate has also increased.
The average personal loan interest rate as of July 27, 2022, is 10.6 percent, a 0.2 percent increase from the beginning of May. Experts have signaled that more rate hikes are likely to occur before the end of the year. If the Fed continues to raise rates, personal loan interest rates will also likely rise.
While rising interest rates are certainly concerning for borrowers in the market for a personal loan, lenders are still offering competitive rates, especially for borrowers with good credit. If you are in the market for a loan, it may be best to act now to avoid higher rates later.
How can you get an affordable loan despite rising interest rates?
Personal loan interest rates are getting more expensive overall, but the federal rate is not the only factor in your loan’s cost. You can do several things to ensure you get the best deal possible, including improving your credit score, shopping for the best lender and applying with a co-borrower.
Here are some of the steps you can take to get the best deal possible on your loan:
- Shop around. Each personal loan lender offers unique rates, features and requirements. It is important to compare rates and terms from multiple lenders before deciding on one. Depending on your borrowing needs and credit background, the lender with the lowest advertised rate might not be the best lender for your situation.
- Check your credit. Lenders give the best rates to the most creditworthy borrowers. Before applying for a loan, know where you stand regarding credit. Look at your current credit score and debt to income ratio to get a better idea of the rates you might qualify for with various lenders. If your credit is poor or you have a lot of debt, consider paying off some of that debt or consolidating before taking on a new loan.
- Prequalify. Most lenders allow you to prequalify online with a soft credit check. This does not impact your credit and allows you to see where you stand without applying.
- Reduce your loan amount and repayment term. If you take out a large loan that takes longer to pay back, you will accrue more interest over your loan. Reducing the scope of your loan will help you save on interest and reduce your overall debt.
- Apply with a co-borrower. If you are having trouble qualifying for the rate you want on your own, you might want to consider applying with a co-borrower whose credit is better than yours. This will increase your chances of qualifying for the best rates and terms.
Should you consider using personal loans for credit card debt consolidation?
Unlike most personal loans, credit cards are variable rate products, meaning that market conditions directly impact the interest rate you pay. If you have credit card debt and are worried about how rising interest rates will impact your monthly payments, it could be worth considering a fixed-rate debt consolidation loan.
Personal loans tend to have lower interest rates than credit cards overall. Suppose you are struggling with credit card debt and your interest rate is unmanageable. In that case, a debt consolidation loan could offer a lower rate, lower monthly payments and a faster way out of debt.
Make sure to prequalify with lenders and figure out what rate you qualify for before deciding to consolidate credit card debt. You should only pursue a debt consolidation loan if you qualify for a lower rate than you are currently paying.
Because personal loans are fixed-interest products, current borrowers will not be affected by the Fed’s rate hikes. While interest rates on new loans are likely to keep rising, new borrowers can still qualify for competitive rates by improving their credit and shopping for the best deals. If you are interested in consolidating debt from a variable interest product, debt consolidation loans could offer a cost-effective solution.