With rising inflation and rate hikes by the Federal Reserve, interest rates for most lending products have increased. While most personal loans are fixed-rate loans, meaning that the interest rate does not change over the life of the loan, borrowers with variable-rate personal loans are directly impacted by the Federal Reserve’s rate hikes.

In addition, Federal rate hikes and inflation do impact interest rates for new fixed rate personal loan borrowers, although indirectly. Personal loan debt in the U.S. reached $192 billion in the second quarter of 2022, and the number of consumers with personal loans reached a record high.

As economic conditions worsen and more Americans find themselves taking on personal loan debt, it is more important than ever for consumers to understand how inflation and Federal rate hikes affect their loans. Before taking out a personal loan, it is important to calculate how much you will be paying in interest to avoid deferring on a loan or taking on unnecessary debt.

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Key statistics
  • The average personal loan interest rate is 11.08%
  • The average personal loan debt per borrower in the U.S. is $10,344
  • The number of subprime borrowers originating personal loans rose 71.2% in the second quarter of 2022.
  • Loan delinquency rates have increased 47% since last year.
  • Inflation is currently sitting at 8.3%, which is an increase of 8.5% year over year
  • The Federal Reserve has raised interest rates five times so far in 2022.
  • The current federal funds rate is 3% to 3.25%
  • The Federal Reserve is likely to raise interest rates to 4.5% to 4.75% by 2023
  • 43% of economists say that inflation has not peaked yet

Why are interest rates rising?

Interest rates are the amount of interest due per period on a loan. They are typically expressed as an annual percentage of the loan amount due.

Interest rates change based on the market demand for credit—the more demand there is for credit products, the higher interest rates are likely to be. If demand for credit products goes down, interest rates will also go down. Decisions from the Federal Reserve also influence interest rates for most credit products. When the federal rate goes up, interest rates tend to rise for most loan products.

The Federal Reserve has raised the federal rate five times this year, and it is likely that they will raise it two more times before 2023. The purpose of these rate hikes is to fight inflation.

Consumers are feeling the weight of rising inflation, especially with the holiday season coming up. According to a recent Bankrate survey, 40% of people say that inflation will change the way they shop in 2022. Many Americans are starting their holiday shopping early and searching for deals and coupons to keep up with rising prices.

However, it does seem that the Fed’s efforts to combat inflation has had a positive impact on the housing market. As mortgage rates are rising, housing prices are beginning to ease. According to Federal Reserve Chairman Jerome Powell, “the deceleration in housing prices that we’re seeing should help bring prices more closely in line with rents and other housing market fundamentals—and that’s a good thing.”

Interest rates impact more than the credit and lending sphere: they affect stocks, bonds, consumer and business spending and inflation. As interest rates continue to rise for most credit products, Americans are feeling the weight of those extra costs. However, with inflation at a 40 year high, it seems that raising rates is the only way to combat rising prices.

According to a Bankrate survey, 40% of winter holiday shoppers say that inflation will change the way they shop in 2022.

— Bankrate Surveybankrate.com

Average personal loan interest rate by credit score

The interest rates you qualify for have a lot to do with your credit history and credit score. Your credit score is the primary factor that most lenders consider when approving or denying your loan application. Borrowers with excellent credit are far more likely to get a lender’s lowest rates than borrowers with fair or bad credit.

Credit Score Average personal loan rate
720-850 10.3%-12.5%
690-719 13.5%-15.5%
630-689 17.8%-19.9%
300-629 28.5%-32.0%

How does age impact credit scores?

Since borrowers with good to excellent credit are more likely to qualify for the best rates, it makes sense that the Baby Boomer generation tends to take out more loans than other generations. Boomers have the highest overall personal loan balance of all generations.

Age/Generation Average credit score
Gen Z 674
Millennials 680
Gen X 699
Boomers 736

How does lender type impact interest rates?

The interest rate you qualify for depends on your credit score and financial background, but it also depends on the type of lender you choose.

Banks tend to have the highest interest rates and strictest eligibility requirements because these institutions are so highly regulated. Credit unions typically have slightly lower rates since they require membership to apply for loan products. However, online lenders typically have the lowest rates of all, as well as the most lenient eligibility requirements.

How does race impact interest rates?

Social bias and racism also play a role in who gets what rates. Research suggests that high-income Black homeowners receive higher mortgage interest rates than low-income White homeowners.

Evidence suggests that Black and Hispanic consumers are more likely to be victims of predatory payday lenders. These disparities are likely due to systemic racism in lending and differing socioeconomic circumstances perpetuated by systemic racism.

How does raising rates help inflation?

In its fight to lower inflation, the Federal Reserve has been aggressively raising interest rates. Ideally, raising interest rates will bring up borrowing costs, causing consumers to spend less money. This will lower the demand for goods and services and cause inflation to fall.

Lowering inflation is the Federal Reserve’s top priority, as inflation is the worst that it has been in 40 years, and consumers feel the weight of that. A recent Bankrate survey found that 55 percent of people say that income has not kept up with the increases in household expenses due to inflation.

Despite these efforts by the Federal Reserve, inflation has continued to worsen, and many experts expect it will get worse before it gets better. Fifty-six percent of Americans are experiencing financial hardship due to inflation.

Consumers are cutting back on spending, driving less and canceling their vacations to cover costs. While lower-income Americans have been feeling the pain of rising prices since last year, middle- and upper-class households are also feeling that pressure. With rising interest rates, it seems that gas and housing prices are beginning to ease a bit. However, many experts believe that inflation has not yet reached its peak. This means that consumers will likely continue to deal with inflation woes even as they face higher interest rates on credit products.

55 percent of working Americans say that income has not kept up with the increases in household expenses due to inflation.

— Bankrate Surveybankrate.com

How do loan interest rates work

Consumers can find and apply for both fixed-rate and variable-rate personal loans. However, fixed-rate personal loans are far more common.

Fixed-rate personal loans have the same interest rate over the life of the loan, meaning that you do not have to worry about your rate going up once you are locked into the loan. Variable-rate personal loans have rates that can go up and down depending on market conditions, meaning that the recent federal rate hikes directly impact the interest rates on these loans.

Fixed-rate personal loans are generally preferred because they are more predictable. While new fixed-rate loan borrowers are likely to see higher interest rates than past borrowers, there is no risk of that rate increasing once you’re locked in, making fixed-rate loans a much safer option.

Borrowers with a variable-rate loan are likely to see higher monthly payments due to rising interest rates. For borrowers on a tight budget, rising rates could mean the difference between paying off the loan and going into delinquency.

Tips for people with variable-rate loans

If you got a variable-rate personal loan when interest rates were low and you’re worried about rising costs, there are some things you can do to avoid paying a fortune in interest.

  1. Pay off your variable rate loan as soon as possible. If you can afford to pay off your loan early, it may be a good idea. Rates are likely to rise before they ease, so paying off your loan before you accrue more interest could help you save money in the long run.
  2. Try getting the remainder of the loan switched to a fixed-interest rate loan. Refinancing your variable-rate loan with a fixed-rate loan will allow you to finish your payments at a steady interest rate. If you choose to refinance, make sure you find a loan with a lower interest rate than your current loan.
  3. Work on your credit score. While market conditions have a huge impact on variable-rate loans, your interest rate is also determined by your credit score. If you can take steps to improve your credit score, you may be able to get a lower interest rate on your loan.
  4. Work on your budget. If rising loan costs strain your finances, it could be worth restructuring your budget and seeing where you could spend more efficiently. Talking to a financial advisor to get advice on how to allocate funds could also help ease the stress of rising costs.
  5. Try negotiating with your lender. There is also the possibility of negotiating a lower interest rate with your lender. It is worth speaking with your lender to see if you can come up with a solution together.

The bottom line

While rising interest rates certainly cause consumer anxiety, America’s current inflation problem is the top priority. Americans are struggling to cover basic necessities and housing, and the Federal Reserve is raising rates to ease that financial burden.

While inflation is likely to worsen before it improves, there have been signs that raising interest rates is beginning to improve housing and gas prices. For consumers struggling with variable-rate credit products, transferring that debt to a fixed-rate credit product could ease that financial strain.

There is no denying that rising interest rates and inflation are both causing financial hardship for consumers, but there are things that individuals can do to stay afloat. If you are having trouble managing your finances during the current uncertainty, look into preparing your finances for a recession.