Several more interest rate hikes are expected from the Federal Reserve within the fiscal year, resulting in higher interest rates for new personal loans. If you’re planning to apply for a personal loan soon, you’ll want to read on so you know how to make wise money moves now in preparation for the increase in borrowing cost.
That said, if you already have a personal loan, you needn’t worry about the interest rate hikes as established loan rates are fixed.
Let’s take a closer look at some questions you may have about personal loan interest rates during this uncertain financial time.
Are Existing Loans at Risk of Rising Interest Rates?
The interest rate on a fixed-rate installment loan stays the same throughout the loan term. This is because the interest rate determines a significant part of the loan payment, so your monthly payment will remain the same throughout the loan.
A personal loan interest rate lock protects your loan from future interest rate increases by the Federal Reserve, so any Fed interest rate hikes should not impact your monthly payments if you have a fixed-rate personal loan.
While most interest rates are fixed for the term of the loan, some lenders offer variable interest rates. As such, those variable rates on personal loans are likely to rise when the federal funds rate increases.
If you have a variable-rate loan, consider transferring the balance to a fixed-rate debt consolidation loan. It might make good financial sense with more rate increases on the horizon.
What Are the Effects of Rising Interest Rates on New Loans?
While rising interest rates may not affect your current fixed-rate loans, they’ll certainly be reflected in the cost of new loans. If you’ve been planning to apply for a personal loan and just haven’t gotten around to it, now’s the time to prioritize it so you can lock in a lower rate and save money in the long run.
Since banks and financial institutions usually set their prime loan rates about three percent above the federal funds’ rate, that overall interest rate will be a lot less wallet-friendly if you wait too long to apply.
Are Personal Loans a Good Idea Right Now?
Though interest rates are currently on the high side, personal loans are certainly a better idea now than they will be in the coming months when rates increase even more.
For the past couple of years, interest rates for personal loans have been relatively low. But since recent geopolitical issues have affected global financial markets, rates have risen and look set to rise again soon. So your best bet is either to take out the loan soon or wait until rates stabilize or decrease again.
How To Deal With Rising Interest Rates
Whenever the Fed takes measures to control inflation, they’re likely to increase interest rates on loans, credit cards, and other credit products.
So, as interest rates continue to rise, here are some tips for managing them:
Debt Consolidation May Be a Good Option
Credit card interest rates tend to rise when the Fed raises interest rates. Your credit card’s annual percentage rate (APR) may be lower if you have good credit and qualify for a debt consolidation loan. Your monthly payment would be lower, which means you might be able to repay your debt sooner.
Fix Your Loan Rate
The interest rate on variable-rate loans is generally lower at the outset than on fixed-rate loans but often increases over time. If you lock in a fixed rate, you can protect yourself from future rate hikes.
Set Aside a Substantial Down Payment
By making a substantial down payment, you reduce your borrowing amount and lender risk at the same time so you may be offered a lower interest rate.
Shorten Your Repayment Period
Simple math will tell you that you pay more interest with a longer loan repayment term. In addition, lenders often charge higher interest rates for longer repayment periods since they must wait longer to be compensated for their investment.
In some cases, you may achieve a lower interest rate by choosing the shortest repayment term, which could translate into lower monthly payments.
Balances on Credit Cards Should Be Paid off
Your credit card debt will be eliminated if you pay your bill every month by the due date. In addition, improving your credit can help you earn better interest rates since lenders usually give better rates to borrowers with good credit.
See how you look to a lender by getting a free copy of your Experian credit report and FICO score. With this tool, you’ll see how certain factors impact your credit score, giving you a better understanding of your credit health and loan eligibility.
Consider Personal Loans Wisely
When you apply for a personal loan, you’ll likely qualify for a lower interest rate if you have a higher credit score. So you’re better off waiting to borrow money if your credit score needs work.
Also, make sure to shop around to find the best loan rate, though keep in mind that the interest rate is just one pricing element to consider. To finalize the loan, you will also have to pay closing costs, so make sure you ask about those costs when shopping.
Remember that while personal loans are beneficial and often a wise financial move, there are other ways to sort your finances during turbulent times. For example, you could start a side hustle, cut unnecessary expenditures, and work diligently to keep on budget. None of these financial solutions requires you to take on additional debt. Many times, making personal sacrifices to ensure a healthier financial outlook for the future is the best we can do for ourselves and our families, especially in uncertain times.
The bottom line is that consumers should be cautious about borrowing money when interest rates are rising. That said, a personal loan may very well be a smart way for you to achieve more financial stability; just do your homework, be wise, and never bite off more than you can chew.