Why the Federal Reserve’s Interest Rate Hikes Could Make Personal Loans More Appealing


A couple meets with a banker to discuss their finances.

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Now’s a really good time to look at a personal loan.


Key points

  • Personal loans are flexible and let you borrow money for any purpose.
  • These loans offer a key advantage over credit cards and other borrowing products with variable interest rates.

In June, the Federal Reserve did something it hadn’t done in years — it raised its benchmark interest rate by 0.75%. And then, in July, it did the same thing again.

The Fed is intentionally raising interest rates in an effort to slow the pace of inflation. In recent months, Americans have been raiding their savings and racking up scores of debt just to keep up with rising living costs. By raising interest rates, the Fed wants to make borrowing more expensive so consumers start spending less, thereby narrowing the gap between supply and demand that triggered this bout of rampant inflation in the first place.

Now to be clear, the Fed doesn’t set consumer borrowing rates directly. Rather, it oversees the federal funds rate, which is what banks charge each other for short-term borrowing. But when those costs rise, they tend to get passed on to consumers in the form of higher credit card interest rates, mortgage rates, and auto loan rates, as just a few examples.

If you have a need to borrow money, it’s important to do so in the most cost-effective manner possible. And in light of recent interest rate hikes, you may want to look to a personal loan for your borrowing needs for a few key reasons.

1. You can borrow at a more competitive rate

At a time when borrowing has gotten expensive, it’s important to find an option that lends to you paying the least amount of interest. And in the battle of credit cards versus personal loans, personal loans win big time. Snagging a lower interest rate on the sum you borrow could result in much more manageable monthly payments, not to mention savings over time.

2. You can lock in a fixed interest rate on your debt

The danger of borrowing money via a product like a credit card or HELOC (home equity line of credit) is that these products tend to come with variable interest rates. That means your rate could rise over time, making your payments more expensive.

When you sign up for a personal loan, you get to enjoy a fixed interest rate on your debt, so you don’t have to worry about that rate climbing as you pay off the amount you owe. Instead, you’ll get the security of having fixed monthly payments.

How to snag a great deal on a personal loan

The stronger your credit score at the time you apply for a personal loan, the more competitive an interest rate you’re likely to qualify for. If your credit score needs work and you can hold off on borrowing money for a bit of time, it pays to try to boost it.

At the same time, it’s a good idea to shop around with different lenders before signing a personal loan. You never know when one lender might step in with a more competitive rate than others, so take a little time to do some rate shopping.

That said, you don’t just want to focus on your loan’s interest rate. You should also pay attention to the fees or closing costs you’ll be charged to finalize that loan.

At a time when interest rates are rising, consumers need to be more careful about borrowing. A personal loan could be a savvy way to borrow money in light of the Fed’s recent interest rate hikes — especially since they may be far from over.

The Ascent’s best personal loans for 2022

Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing The Ascent’s best personal loans for 2022.



Read More: Why the Federal Reserve’s Interest Rate Hikes Could Make Personal Loans More Appealing

2022-08-13 04:00:33

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