Inflation Rose in February. Here’s What That Could Mean for Personal Loan Borrowers

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A month-over-month rise in inflation could make borrowing more expensive. 

Inflation has been battering consumers since 2021. But back then, many people at least had boosted tax credits and stimulus funds to ease the blow. In 2022, there was no stimulus aid to be had, and as a result, many people were forced to rack up credit card debt and deplete their savings to cope with higher costs.

Meanwhile, the Bureau of Labor Statistics just released data from February’s Consumer Price Index (CPI), which measures changes in the cost of consumer goods and services. The index showed a 0.4% rise in inflation from January to February. The annual rate of inflation, however, fell from 6.4% in January to 6% in February. And the latter is a pretty positive development.

Still, those looking to borrow money in just about any shape or form should proceed with caution in light of February’s CPI reading. And that extends to those looking to take out a personal loan.

Borrowing could get more expensive

The Federal Reserve has been on a mission to combat rampant inflation. To that end, it’s been implementing interest rate hikes since early 2022 that have been driving the cost of consumer borrowing upward.

Now, the Fed doesn’t set consumer interest rates directly. Those are established by banks and lending institutions. But when the Fed raises its federal funds rate, which is what banks charge one another for short-term borrowing, consumer borrowing costs tend to climb as a result.

That explains why it’s more expensive to take out a personal loan these days than it was a couple of years ago. And it also explains why personal loan borrowers now need to be very careful before locking themselves into loan agreements.

The Fed might very well raise interest rates again in the wake of February’s CPI data. That could make personal loans — a once-affordable borrowing option — too expensive for a lot of people.

Don’t get in over your head

The great thing about personal loans is that they’re flexible. You can use your loan proceeds to pay for just about anything, whether it’s home renovations or car repairs. And personal loans tend to offer competitive interest rates compared to other borrowing products.

But if the Fed hikes up interest rates yet again, personal loans might become prohibitively expensive for many consumers. And one thing you don’t want to do is sign up for a personal loan whose monthly payments are a stretch for you.

Any time you fall behind on debt payments, you risk extensive damage to your credit score. And personal loans are no different. So before you sign one, run the numbers based on the interest rates you’re being offered to see what your monthly payments will look like — and make sure those work for you.

Furthermore, unless you have a pressing need to borrow money, it could be beneficial to hold off on signing a personal loan until borrowing rates come down across the board. But that may not happen for quite some time due to the current state of inflation — and the fact that despite many months of interest rate hikes, it remains stubbornly high.

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