What Do Rising Interest Rates Mean for Personal Loans?

In an effort to slow inflation, the Federal Reserve is increasing interest rates and has indicated that more increases are expected throughout 2022.

Hikes to the federal funds rate tend to make borrowing more expensive for consumers, but not all types of financing are affected the same.

While it’s possible personal loans may see an uptick in average interest rates, the cost of borrowing with a personal loan is still heavily influenced by factors under your control, including your desired loan amount and term, credit score and existing debts.

Fixed-rate vs. variable-rate loans

Most personal loans are fixed-rate loans, meaning the annual percentage rate, which includes interest and any fees, doesn’t change over the course of the loan.

This distinction matters because unlike variable-rate loans, such as home equity lines of credit, fixed-rate loans aren’t as dependent on market conditions, says Michael Shepard, senior vice president of direct consumer lending at U.S. Bank.

“Variable-rate loans tend to be aligned very much with the federal funds rate,” he says. “With shorter-term fixed-rate loans, it’s a factor, but it’s not really a one-for-one correlation.”

Harry Zhu, senior vice president and chief retail lending officer at Alliant Credit Union, believes personal loan rates will go up, especially if the Fed raises the federal funds rate multiple times this year. How much rates increase is less clear, he says.

» MORE: Best rates on personal loans

Is it a good time to get a personal loan?

If you’re already planning to apply for a personal loan in the coming months, getting one now could save you from a slightly higher interest rate.

Rates for personal loans have been relatively low since the start of the pandemic, and even small increases can make a substantial difference in the amount of interest you ultimately pay.

For example, a $15,000 personal loan paid over five years at a 10% interest rate costs $4,122 in interest. The same loan at 12% interest costs $5,020.

Given the rising rate environment, taking out a personal loan now makes sense, according to Zhu.

“If you have a need, I think it’s a good idea to lock in a relatively low rate," he says.

Borrowers who aren’t sure about getting a loan shouldn’t let rate hikes rush them into a decision they’re not ready to make, though.

Dan Herron, a certified financial planner based in San Luis Obispo, California, urges caution around taking out personal loans, especially if there’s a chance you could default.

“As an advisor, I want my clients to make sure they fully understand the ramifications of this loan and what happens if you don’t pay it off in a certain amount of time,” he says.

Personal loans for rising credit card rates

Borrowers looking to consolidate credit card debt — a common use for personal loans — may want to pay special attention to upcoming rate hikes since the interest rates on credit cards, a type of variable-rate financing, will likely increase.

If you qualify for a lower rate on a debt consolidation loan than the rate you pay on your credit cards, you can save money on interest, lower your monthly payment and potentially get out of debt faster.

While consolidating debt at a lower rate is generally a good idea, says Herron, make sure you’ve resolved any circumstances that led to debt in the first place.

How to get the most affordable personal loan

Trends in overall interest rates are just one factor that make up the rate you receive on a personal loan. Here’s how to maximize your chances of getting the cheapest loan possible.

Check your credit: Your credit score and credit history have a big impact on your personal loan rate. Build your credit before applying for a loan, and look for any errors on your credit report that could bring down your score.

Pay off other debts: Lenders will evaluate your other debts when assessing your loan application. If you can pay down any debts before applying, this can lower your rate.

Reduce your loan amount and term: Larger loans may come with a steeper interest rate, since they represent more risk to the lender. And the longer the repayment term, the more interest you’ll pay. To reduce costs, ask for the lowest loan amount that still covers your expense and choose the shortest term with monthly payments you can afford.

Add collateral: Tying collateral like your vehicle or an investment account to your loan application helps guarantee the loan, leading to a more competitive rate. However, if you default, the lender can seize the asset.

Add an applicant: Joint and co-signed loans can mean lower interest rates if the additional applicant has a higher credit score or income than you do. This applicant will be held equally responsible for loan payments.

Choose the right lender: Shop around for the most affordable personal loan you can find. Banks tend to offer the lowest rates on personal loans for borrowers with good and excellent credit (690 FICO or higher). Credit unions also offer affordable loans and will generally consider borrowers with lower credit scores. Online lenders serve borrowers across the credit spectrum, but rates may be higher.

Pre-qualifying with multiple lenders is one of the best ways to check potential rates without hurting your credit score, but not all lenders offer this feature.