Personal Finance

How Rising Personal Loan Interest Rates Will Impact Borrowers

Personal loan interest rates are on the rise, reaching their highest rate since before the coronavirus pandemic. While existing borrowers with fixed-rate loans won’t be impacted, those with variable interest rates may have already seen their rates go up. Additionally, new loans will be more expensive than they were earlier in the year.

Key Takeaways

  • The cost of borrowing via personal loan has 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 rising costs.
  • Borrowers should carefully consider the cost of borrowing and shop around before applying for a loan.

Why Personal Loan Interest Rates Are Increasing

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’s also the first time the average rate has exceeded 10% since 2019 when it reached 10.32%.

The primary reason for interest rates rising is the Federal Reserve’s decision to hike its federal funds rate in six consecutive committee meetings throughout 2022 in an attempt to combat 40-year high inflation numbers. 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 haven’t risen at the same pace as the federal funds rate, partly due to high demand from consumers, fueling competition among lenders to keep rates low. Still, borrowers can expect the cost of borrowing to continue to rise as long as the Federal Reserve continues its policy to hike its rate.

How Will Borrowers Be Impacted?

Most personal loans carry fixed interest rates that don’t fluctuate during the loan’s term. For borrowers who have fixed-rate personal loans, there won’t be any impact on their cost of borrowing.

However, borrowers with variable-rate loans, which are less common, may see their interest rate—and therefore, monthly payment—rise. Borrowers should review their loan agreement or contact their lender to understand how often their rate will change and whether there are 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 large 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 borrowing 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 instance, it can still be worth it 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 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 multiple lenders, looking at interest rates, origination fees, repayment terms, and other factors. If your rate quote is high, consider improving your credit or applying with a co-signer or joint applicant to potentially secure more favorable terms.

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