To combat record inflation, the Federal Reserve raised interest rates by 0.75 percentage points at the last meeting of the Federal Open Market Committee, bringing the new benchmark to 3-3.25%. This is the fourth rate hike since the start of the year. Experts expect federal interest rates to hit 3.4% by the end of 2022. These rate hikes will likely impact the interest rates offered by personal lenders.
Most personal loans have fixed rates, so current borrowers don’t have to worry about their interest rates changing. Borrowers in the personal loan market should be prepared for rising interest rates, but there are things you can do to mitigate these costs.
“Rising interest rates are not good news for those in the market to borrow,” said Greg McBride, chief financial analyst at Bankrate. “But borrowers with strong credit will continue to find very competitive terms even in the face of another big Fed rate hike. It’s 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, which means the interest rate you pay does not change for the life of your loan. Borrowers with a fixed rate personal loan will not see a change in their interest rate or monthly payments.
When you receive a fixed rate loan, you lock in an interest rate. Regardless of market conditions, your interest rate should remain unchanged and the overall cost of your loan unchanged. However, some lenders offer variable rate personal loans.
Borrowers with a variable rate personal loan may see their interest rate increase with the federal rate. It may be worth considering transferring your current balance to a fixed rate debt consolidation loan if you have a variable rate loan.
How will the Fed’s rate hike affect new personal loan borrowers?
The federal interest rate set by the Fed influences the preferential interest rates offered by lenders to new borrowers. The average personal loan interest rate was 10.28% at the start of 2022 and has steadily increased throughout the year. As the Fed introduced several rate hikes, the average personal loan rate also increased.
The average interest rate for personal loans as of September 27, 2022 is 10.7%, an increase of 0.3% compared to the beginning of May. Experts have signaled that more rate hikes are expected before the end of the year. If the Fed continues to raise rates, personal loan interest rates will also rise.
While rising interest rates are certainly a concern for borrowers in the personal loan market, lenders are still offering competitive rates, especially for borrowers with good credit. If you’re looking for a loan, it may be best to act now to avoid higher rates later.
How to get an affordable loan despite rising interest rates?
Personal loan interest rates are getting more expensive overall, but the federal rate isn’t the only factor in the cost of your loan. There are several things you can do to make sure you get the best deal possible, including improving your credit score, researching the best lender, and applying with a co-borrower.
Here are some of the steps you can take to get the best possible deal on your loan:
- Compare the prices. Each personal lender offers unique rates, features and requirements. It’s important to compare rates and terms of several lenders before choosing one. Depending on your borrowing needs and credit history, the lender with the lowest advertised rate may not be the best lender for your situation.
- Check your credit. Lenders give the best rates to the most creditworthy borrowers. Before you apply for a loan, know where you stand on credit. Take a look at your current credit score and debt-to-equity ratio to get a better idea of the rates you might qualify for with various lenders. If your credit is poor or you have a lot of debt, consider paying off some of that debt or consolidating before taking out a new loan.
- Pre-qualified. Most lenders allow you to prequalify online with a soft credit check. It doesn’t affect your credit and lets you see where you stand without making a request.
- Reduce your loan amount and repayment term. If you take out a large loan that takes longer to repay, you will accrue more interest on your loan. Reducing the scope of your loan will help you save on interest and reduce your overall debt.
- Apply with a co-borrower. If you’re having trouble qualifying for the rate you want on your own, you might want to consider applying with a co-borrower whose credit is better than yours. This will increase your chances of benefiting from the best rates and conditions.
Should you consider using personal loans for credit card debt consolidation?
Unlike most personal loans, credit cards are variable rate products, which means that market conditions have a direct impact on the interest rate you pay. If you have credit card debt and are worried about the impact of rising interest rates on your monthly payments, it might be worth considering a fixed rate debt consolidation loan.
Personal loans tend to have lower interest rates than credit cards in general. Suppose you are struggling with credit card debt and your interest rate is unmanageable. In this case, a debt consolidation loan could offer a lower rate, lower monthly payments and a faster way to get out of debt.
Be sure to prequalify with lenders and determine the rate you qualify for before deciding to consolidate your credit card debt. You should only apply for a debt consolidation loan if you qualify for a lower rate than you are currently paying.
At the end of the line
Since personal loans are fixed rate products, existing borrowers will not be affected by Fed rate hikes. While interest rates on new loans are likely to continue to rise, new borrowers can still benefit from competitive rates by improving their credit and finding the best deals. If you want to consolidate your debts from a variable rate product, debt consolidation loans could be a cost-effective solution.