How Will the Latest Federal Reserve Interest Rate Hike Impact Personal Loan Borrowers?

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

The Fed just raised its benchmark interest rate by 0.25%. Read on to see how that might impact personal loans. 

Consumers have been struggling with soaring inflation since mid-2021, to the point where many people have had to consistently delay bills, raid their savings accounts, and rack up debt just to stay afloat. The Federal Reserve is well aware that rampant inflation is a problem. And it’s been implementing interest rate hikes since early 2022 in an effort to slow down the pace of inflation.

On May 3, the Fed raised its benchmark interest rate by 0.25% for the third time in 2023. That move wasn’t particularly surprising, either, seeing as how the central bank has pledged repeatedly that it won’t stop raising interest rates until inflation reaches the 2% mark. As of March, it sat at 5%, as measured by that month’s Consumer Price Index.

But while interest rate hikes may be necessary to bring inflation down to a more moderate level, they’ve been hurting consumers by driving the cost of borrowing up. And so if you’re looking to take out a personal loan, you may find that the interest rate you qualify for isn’t one you’re particularly happy with.

A personal loan might cost you big time

The Federal Reserve does not set consumer borrowing rates, like personal loan rates, auto loan rates, and mortgage rates. But when it raises its benchmark interest rate, the cost of consumer borrowing tends to rise.

If you have plans to take out a personal loan, you may want to rethink them. If you apply for one of these loans in the near term, you might end up getting stuck with an interest rate that’s way higher than what you want it to be.

Now, you should know that the higher your credit score when you apply for a personal loan, the more favorable an interest rate you’re likely to qualify for. But unfortunately, because borrowing rates are already so high, you might end up with a less favorable rate on a personal loan even if your credit score is outstanding.

Your existing personal loan won’t be affected

One of the benefits of borrowing with a personal loan, as opposed to a credit card or home equity line of credit, is that the interest rate on your loan is fixed. That means you’ll have the same monthly payments throughout the life of your loan (assuming you don’t refinance it, but that’s something you would need to actively do).

As such, if you’re already in the process of paying off a personal loan, you can rest assured that the Fed’s latest rate hike won’t result in higher costs or payments for you. It’s consumers who are now seeking out personal loans who might be impacted by the latest uptick in interest rates.

It pays to wait

You may be eager to take out a personal loan to do something like renovate your home. But if your need for money isn’t urgent, then it could work to your benefit to hold off on taking out a personal loan. The cost of doing so right now is apt to be high regardless of your credit profile. So if you can wait until borrowing rates drop across the board, that’s really a better bet.

Our picks for the best credit cards

Our experts vetted the most popular offers to land on the select picks that are worthy of a spot in your wallet. These best-in-class cards pack in rich perks, such as big sign-up bonuses, long 0% intro APR offers, and robust rewards. Get started today with our recommended credit cards.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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.The Motley Fool has a disclosure policy.

 Read More