How borrowers are affected by rising interest rates

Personal loan rates are rising, reaching their highest level since before the corona virus pandemic. While existing borrowers with fixed rate loans are unaffected, those with variable rate loans may have already seen interest rates rise. In addition, new loans are getting more expensive than they were at the beginning of the year.

Why are interest rates on personal loans rising?

The average interest rate on a two-year personal loan hit 10.16% in the third quarter of 2022, according to the Federal Reserve. This is an increase from the pandemic-era low of 8.73% in the previous quarter. It is also the first time since 2019 that the average rate exceeds 10%, when it reached 10.32%.

The main reason for the rate hike is the Federal Reserve’s decision to raise the federal funds rate at six consecutive committee meetings in 2022 to combat 40-year high inflation rates.

While this interest rate does not directly affect personal loan rates, it does affect the prime rate, a benchmark that lenders use to determine their own interest rates.

But affects personal loan rates have not risen at the same pace as federal funds rates, in part because of strong consumer demand, fueling competition among lenders to keep interest rates low. Still, borrowers can expect the cost of borrowing to continue to rise as the Federal Reserve continues its policy of tightening interest rates.

How are borrowers affected?

Most personal loans have fixed interest rates that do not fluctuate over the life of the loan . There is no impact on borrowing costs for fixed rate personal loan borrowers.

But for borrowers with adjustable-rate loans , which are less common, the interest rate — and therefore the monthly payment — may increase. Borrowers should review their loan agreement or contact their lender to find out how often their interest rates change and whether there are limits on rate increases.

However, most of the impact of rising interest rates will fall on new borrowers. Whether you’re borrowing money to consolidate debt, improve your home, or cover other big expenses, you can expect to pay more.

Precautions when applying for a personal loan

If you are considering applying for a personal loan, think carefully about why you want to take out a loan and whether you can comfortably afford the monthly payment.

If you want to use the loan, for example, to improve your financial situation through debt consolidation or to cover emergency expenses, it may still be worth it despite the higher interest rates. But if you’re thinking about taking out a loan to pay for a vacation or something else that isn’t urgent, you might be better off waiting for lower interest rates.

Once you’ve decided a personal loan is right for you, take the time to research and compare multiple lenders, considering interest rates, processing fees, payment terms, and other factors. If your interest rate offer is high, consider upgrading your credit score or applying with a co-signer or joint applicant for potentially more favorable terms.