Borrowing money for personal loans is yet another facet of American finances that will feel continued ripples from the Federal Reserve’s rate increases over the past year — seven altogether. Bankrate Chief Financial Analyst Greg McBride, CFA explains the relationship between expected personal loan rates and an increased federal funds rate, which continue to stay steady at 5.25-5.5 as of the latest meeting on Nov. 1, 2023.

More rate hikes from the Federal Reserve will put upward pressure on personal loan rates. The prime rate often serves as the baseline for how personal loans are priced and the prime rate increases in lockstep with the Fed funds rate.” So as the Fed works to address inflation, borrowers can expect higher personal loan interest rates in 2023

— Greg McBride, CFABankrate chief financial analyst

As the Fed works to address inflation, borrowers can expect higher personal loan interest rates in 2023.

  • Personal loan rates to continue to increase slightly in 2023 due to pressure from the Fed.
  • Average interest rates increased from 10.28 percent in early January to 11.54 percent in December 2023.

What happened to personal loan rates in 2022

The past year saw the fastest pacing of interest rate increases in the last 40 years. This increase was felt across the financial spectrum. The use of personal loans, though, grew over the past year, hitting $210 billion, according to TransUnion. This 34.1 percent increase compared to 2021 was due in some parts to stability in the personal loan space for most of 2022.

On top of that, growth was caused by lenders’ continued expanded coverage of more below-prime-risk borrowers. In 2021, due to COVID-19’s negative impact on our economy, some lenders responded by tightening their lending standards, making it harder for some borrowers to get approved for personal loans. But in 2022 some lenders went the opposite direction as the economy recovered.

The surge in below-prime borrowers also meant an increase in delinquency rates. 60 days past due delinquency passed pre-pandemic levels, a year-over-year increase of 54 percent, the highest level since 2014, according to TransUnion.

Lending standards to tighten in 2023

Although 2022 saw a boost in those taking out personal loans as many lenders eased their lending standards to assist in economic recovery, 2023 will likely not carry the same fortune.

“Lending standards will tighten as the economy weakens, unemployment rises, and loan delinquencies increase.”

— Greg McBride, CFABankrate chief financial analyst

Some of the most impacted borrowers will be those with poor credit, says McBride, “as approvals will be tougher to come by and will come with higher interest rates, lower approval amounts, or both.” As a response, some lenders may shift focus to originations with prime borrowers to reduce the risk of increased delinquency.

This has already been seen in averages for borrowers with scores between 300 and 689 receiving rates anywhere from 17.80 percent to sky-high rates near 33 percent, according to Bankrate research.

As of December 2023, the average personal loan interest rate is 11.54 percent, although lenders offer rates anywhere from just under 6 percent to 36 percent.

Next steps for consumers

With the possibility of a recession likely, McBride’s advice for the coming year is simple: save more. “Higher borrowing costs and the prospect of a weaker economy,” says McBride, “do not make for good borrowing conditions.”

The better course, he explains, is to build up “savings that can be used in lieu of borrowing – or at least reduce the amount of borrowing needed.”

Consider the following money-saving tips after the ball drops to ring in 2023.

  • Increase your credit score — as it serves as one of the main determinants for the interest rate, take time to put yourself in the best position to borrow.
  • Pay down any debt. Your credit utilization ratio makes up for 30 percent of your FICO score, it is wise to work to decrease debt before applying for a loan.
  • Compare many lender options to increase your odds of finding the lowest rates possible.
  • Although most lenders enforce fees, not all are created equal. Read the fine print before agreeing to loan terms that carry hefty fees.

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