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To combat record-breaking inflation, the Federal Reserve raised interest rates by 0.75 of a percentage point at the DecemberFederal Open Market Committee meeting. This is the seventh rate hike this year, and the fifth time in a row the Fed has raised rates by 75 basis points. These rate hikes have impacted 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 who already have 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. If you have a variable-rate loan, it may be worth considering transferring your current balance to a fixed-rate debt consolidation 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 for 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 January 25, 2023, is currently 10.6 percent. While the Fed has signaled that it will likely stop raising interest rates at some point in 2023, more rate hikes are likely to occur next year. As the Fed continues to raise rates, personal loan interest rates are likely to continue rising.
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 on.
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 thing affecting your loan’s cost. You can do several things to help get the best deal possible, including improving your credit score, shopping around 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 personal loan:
- Shop around
- Check your credit
- Reduce your loan amount and repayment term
- Apply with a co-borrower
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. If you are struggling with credit card debt and your interest rate is becoming unmanageable, 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.