How Rising Personal Loan Interest Rates Will Impact Borrowers

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

Key operations

  • Borrowing costs via a personal loan rose during 2022, reaching pre-pandemic levels.
  • This may affect some existing personal loans, but for the most part new borrowers will bear the brunt of the rising costs.
  • Borrowers should carefully consider the cost of borrowing and shop around before applying for a loan.

Why are interest rates on personal loans increasing?

The average two-year personal loan interest rate 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 the average rate has exceeded 10% since 2019 when it reached 10.32%.

The primary reason for the rate hike is the Federal Reserve’s decision to raise the federal funds rate at six consecutive board meetings through 2022 in an attempt to combat 40-year high inflation. While this rate does not directly affect personal loan rates, it does have an impact on the prime rate, the benchmark that lenders use to set their own interest rates.

But personal loan rates have not risen at the same rate 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 borrowing costs to continue to rise as long as the Federal Reserve continues its rate hike policy.

How will this affect borrowers?

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, could see their interest rate rise, and thus their monthly payments. 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.

However, the main impact of rising interest rates will be new borrowers. Whether you’re borrowing money to consolidate debt, make home improvements, or cover other big expenses, you can expect to pay more.

Should you apply for a personal loan?

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

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 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 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 price is high, consider improving your credit or applying with a co-signer or joint applicant to potentially secure better terms.

Source

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