The Effect of The Federal Reserve on Personal Loans
Most personal loans come with fixed rates, which means current borrowers don’t have to worry about fluctuations in their interest rates. However, those seeking a personal loan should be prepared for rising interest rates and take steps to minimize these costs.
“Rising interest rates aren’t good news for prospective borrowers,” says Greg McBride, Bankrate’s chief financial analyst. “But individuals with strong credit will still find competitive terms, even with another significant Fed rate hike. It’s crucial to compare different lenders to secure the best deal.”
How does the Fed affect existing personal loans?
The federal interest rate set by the Fed directly impacts the prime interest rates that lenders offer to new borrowers. At the beginning of 2022, the average personal loan interest rate was 10.28 percent and has been rising steadily since. As the Fed implemented rate hikes throughout 2022 and 2023, the average personal loan rate also increased.
As of May 15, the average personal loan interest rate stands at 12.20 percent. While further rate hikes are unlikely, rates remain at historic highs.
How the Fed impacts fixed vs. variable-rate loans
The good news for borrowers is that personal loans typically come with fixed interest rates, meaning the rate remains consistent from the start of the loan to its payoff. This stability ensures that borrowers with fixed-rate personal loans won’t experience changes in their interest rate or monthly payments when the Fed adjusts rates.
For fixed-rate loans, your interest rate stays unchanged, keeping the overall cost of your loan unaffected regardless of market conditions. If you secured a low-interest fixed-rate personal loan, it remains protected from federal rate fluctuations.
However, borrowers with variable-rate personal loans are more susceptible to rate increases in line with the federal rate. Given the recent rapid rate hikes, it might be wise to transfer your variable-rate balance to a fixed-rate debt consolidation loan to avoid rising costs.
Will personal loan interest rates start to decrease?
Powell has indicated that rates are likely to increase this year, albeit at a slower pace than previous hikes. Fed policymakers are referring to the current decision as a “skip.” Rates are not decreasing, and there’s no clear indication of when they might.
Mark Hamrick, Bankrate’s senior economic analyst and Washington Bureau Chief, has his predictions. Given the Fed’s 2 percent inflation target and current CPI trends, he believes the Fed isn’t ready to declare “mission accomplished” on rate hikes but feels confident it’s on the right path.
“If inflation has peaked, as it seems to have, and if the Fed is nearly done (or done) raising rates, then borrowers will see rates peak as well,” he notes. “However, the future trajectory of rates remains uncertain, meaning elevated rates might persist for some time.”
Due to recent macroeconomic trends and past Fed hikes, Hamrick predicts that the Fed’s rate increases may be slowing. “With 500 basis points of tightening since March of last year, we can say with certainty that the job of boosting rates is nearly finished, but even the Fed doesn’t yet know what it will do at future meetings,” Hamrick says.
Oliver Rust, head of product at Truflation, writes that we might have a clearer idea about potential rate decreases by the end of the year. “Before the May inflation announcement, it was assumed the Fed would hold steady until the summer break and re-evaluate in September. This still seems likely,” Rust comments.
How can you get an affordable loan despite high interest rates?
Personal loan interest rates are on the rise, but the federal rate isn’t the only factor influencing your loan’s cost. There are several strategies you can employ to secure the best possible deal, such as improving your credit score, comparing lenders, and applying with a co-borrower.
Here are some steps to help you get the best deal on your personal loan:
- Shop around: Compare offers from multiple lenders to find the most favorable terms.
- Check your credit: Ensure your credit report is accurate and work on improving your credit score if needed.
- Prequalify: Prequalify with different lenders to see your potential rates without impacting your credit score.
- Reduce your loan amount and repayment term: Borrow only what you need and opt for a shorter repayment period to save on interest.
- Apply with a co-borrower: Having a co-borrower with good credit can help you qualify for better rates and terms.
In Conclusion
Existing borrowers with fixed-interest personal loans won’t see changes due to the Fed’s rate hikes. However, new borrowers might face higher rates, but they can still secure competitive deals by enhancing their credit and comparing offers. For those considering consolidating debt from variable interest products, debt consolidation loans could provide a cost-efficient option.
