How Rising Personal Loan Interest Rates Will Impact Borrowers

Interest rates on personal loans are on the rise, reaching their highest rate since before the coronavirus pandemic. While existing borrowers with fixed rate loans will not be affected, those with variable interest rates may have seen their rates rise. In addition, new loans will be more expensive than at the beginning of the year.

Keys to take

  • The cost of personal loan borrowing increased throughout 2022, reaching pre-pandemic levels.
  • Some existing personal loans may be affected, but for the most part, new borrowers will bear the brunt of the increased costs.
  • Borrowers should carefully consider the cost of the loan and shop before applying for a loan.

Why personal loan interest rates are rising

The average interest rate on a two-year personal loan reached 10.16% for the third quarter of 2022, according to the Federal Reserve. That’s up from a pandemic-era low of 8.73% in the previous quarter. It is also the first time the average rate has exceeded 10% since 2019 when it reached 10.32%.

The main reason for the rise in interest rates is the Federal Reserve’s decision to raise its federal funds rate at six consecutive committee meetings through 2022 in an attempt to combat 40-year high inflation. While that rate doesn’t directly influence personal loan rates, it does have an impact on the prime rate, a benchmark that lenders use to determine their own interest rates.

But personal loan rates have not risen at the same pace as federal funds rates, in part because of strong consumer demand, which is fueling competition among lenders to keep rates low. Still, borrowers can expect the cost of borrowing to continue to rise as the Federal Reserve continues its rate hike policy.

How will borrowers be affected?

Most personal loans have fixed interest rates that do not change during the term of the loan. For borrowers who have fixed rate personal loans, there will be no impact on their cost of borrowing.

However, borrowers with variable rate loans, which are less common, may see their interest rate and thus monthly payment go up. Borrowers should review their loan agreement or contact their lender to find out how often their rate will change and if there are limits on rate increases.

The impact of the rate hike will, however, be on new borrowers. Whether you’re borrowing money to consolidate debt, make home improvements, or cover other important expenses, you can expect to pay more.

Should you apply for a personal loan?

If you’re thinking about applying for a personal loan, carefully consider your reasons for taking out a loan and whether you can comfortably afford the monthly payment.

If you’re planning to use the loan to improve your financial situation through debt consolidation or to cover emergency expenses, for example, it may still be worth it despite the higher rates. But if you’re considering a loan to pay for a vacation or something else that isn’t urgent, it might be better to wait for lower rates.

If you’ve decided that a personal loan is right for you, take your time to shop around and compare several lenders, looking at interest rates, origination fees, repayment terms and other factors. If your quote is high, consider improving your credit or applying with a co-signer or joint applicant to get better terms.

Source

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