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To combat record inflation, the Federal Reserve raised interest rates by 0.75 percentage points at the November meeting of the Federal Open Market Committee. This is the sixth rate hike so far this year, and the fourth time in a row the Fed has raised rates by 75 basis points. The federal funds rate now sits at 3.25% and experts expect it to hit 4.4% by the end of 2022. interest 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 who already have a fixed rate personal loan will not see any changes to 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. If you have a variable rate loan, it may be worth considering transferring your current balance to a fixed rate debt consolidation 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 personal loan interest rate as of November 1, 2022 is currently 11.28%, an increase of 0.87% from the end of July. Although the Fed has signaled that it will likely stop raising interest rates at some point in 2023, more rate hikes are expected next year. As the Fed continues to raise rates, personal loan interest rates are expected to continue to 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 thing that affects the cost of your loan. There are several things you can do to 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 personal loan:
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. If you’re struggling with credit card debt and your interest rate is getting unmanageable, a debt consolidation loan could offer a lower rate, lower monthly payments, and a faster way to get you 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.