How Rising Personal Loan Interest Rates Will Affect Borrowers

Personal loan interest rates are on the rise, reaching their highest since before the coronavirus pandemic. While existing borrowers with fixed rate loans will not be affected, those with variable interest rates may have already seen their rates increase. In addition, new loans will be more expensive than they were earlier in the year.

Key points to remember

  • The cost of borrowing through a personal loan has increased throughout 2022, reaching pre-pandemic levels.
  • Some existing personal loans could be affected, but for the most part, new borrowers will bear the brunt of rising costs.
  • Borrowers should carefully consider the cost of borrowing and shop around 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 the pandemic-era low of 8.73% in the previous quarter. It is also the first time that the average rate has exceeded 10% since 2019 when it reached 10.32%.

The main reason for the interest rate hike is the Federal Reserve’s decision to raise its federal funds rate in six consecutive committee meetings throughout 2022 in an effort to combat high inflation rates. for 40 years. Although this rate does not directly influence personal loan rates, it does impact 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 the federal funds rate, in part because of strong consumer demand, fueling competition among lenders to keep rates low. Nonetheless, borrowers can expect the cost of borrowing to continue to rise as long as the Federal Reserve continues its rate hike policy.

How will borrowers be affected?

Most personal loans have fixed interest rates that do not fluctuate over 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 therefore their monthly payment – ​​increase. Borrowers should review their loan agreement or contact their lender to find out how often their rate will change and if there are any caps on rate increases.

The brunt of the impact of rising rates, however, will be new borrowers. Whether you’re borrowing money to consolidate debt, make home improvements, or cover other major expenses, you can expect to pay more.

Should I apply for a personal loan?

If you’re considering applying for a personal loan, carefully consider your reasons for borrowing and whether you can comfortably afford the monthly payment.

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

If you’ve decided that a personal loan is right for you, take the time to shop around and compare multiple 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 co-applicant for potentially more favorable terms.

About Roberto Frank

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