Annual Inflation Is Down. Here’s Why That’s Good News for Personal Loan Borrowers

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Cooling inflation could lead the Federal Reserve to stop raising interest rates. Read on to see how that might impact people looking for personal loans. 

Inflation has been a problem for consumers since mid-2021. And about a year ago, in June 2022, it peaked at 9.1%, as measured by the Consumer Price Index (CPI).

But this past June’s CPI reading was far more favorable. It had annual inflation measured at just 3%.

Now, that’s still higher than what the Federal Reserve wants to see. The Fed has long targeted 2% inflation because it feels that this level is most conducive to a stable, secure economy. But since 3% inflation also isn’t so far off from 2%, the Fed may decide to hit pause on interest rate hikes in the near term. And that could be a very good thing for consumers looking to take out personal loans.

Consumers need some relief from high borrowing costs

The Federal Reserve has raised interest rates 10 times since March 2022. Last month, it hit pause on interest rate hikes in light of cooling inflation. And given June’s CPI reading, it might agree to not raise interest rates at its upcoming July meeting, either.

That could do a world of good for consumers looking for personal loans.

The Fed’s recent string of interest rate hikes has made borrowing expensive across the board. These days, it costs more money to carry a credit card balance, finance a car, and tap home equity via home equity loans and lines of credit. So if the Fed hits the brakes on interest rate hikes, consumers needing to borrow money in the coming months may not see their costs of doing so rise compared to where things stand now.

Of course, a pause in interest rate hikes won’t impact current personal loan borrowers. Unlike credit cards and HELOCs, where interest rates can be variable, personal loans are generally locked in at a fixed interest rate. So someone who’s in the middle of paying one off won’t see their rate drop if the Fed pauses rates or even cuts rates as inflation moderates. Rather, a lack of continued rate hikes could benefit people who are thinking of signing a personal loan this summer.

Should you take out a personal loan?

The upside of getting a personal loan is that you can borrow money for any purpose. And if you have strong credit, you may find that it’s easy to qualify for one.

But remember, it’s still more expensive to take out a personal loan today than it was a few years ago. And at the end of the day, you’ll need to make sure you can pay that loan back. So before you sign one, think about why you’re borrowing in the first place and run some numbers to make sure the monthly payments you’ll be looking at are affordable to you.

Also, make sure to explore other borrowing choices that might be more cost-effective. If you have equity in your home, a home equity loan might result in a lower interest rate on the sum you’re borrowing. You’ll need to do some research to find out, but it’s worth making the effort if your goal is to borrow as inexpensively as possible.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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