Personal Loans

What Does the Fed Rate Hike Mean for Personal Loans?

The Fed raised rates for the first time in 4 years. Learn what that means for personal loans and the interest you'll pay on one.
A young man sits outside as he uses his tablet to apply for a personal loan.
By Chris Kissell
Posted on: March 23rd, 2022

For the first time since late 2018, the U.S. Federal Reserve Board has raised its target federal funds rate. If you are shopping for a personal loan, the move could make it more expensive for you to borrow.

On March 16, the Federal Reserve increased the federal funds rate by a quarter-point, to a range of between 0.25% and 0.5%. Previously, the rate had been in a range between 0 and 0.25%.

The Federal Reserve is raising rates in an attempt to combat inflation, which has been raging throughout the economy for many months. The quarter-point increase probably seems like a small move, but it can have a big impact on millions of people who have credit cards or loans.

Why Does the Federal Funds Rate Matter?

The federal funds rate is the rate banks pay when they borrow overnight in the federal funds market. Essentially, a higher federal funds rate means it costs more for banks to borrow from one another.

To make up for this added expense, lenders usually respond to a Fed rate hike by increasing the rates they charge to consumers who borrow through credit cards, personal loans, and other types of lending.

Precisely when customers can expect to see such rate increases varies from lender to lender. However, rates often begin to rise within one or two billing cycles.

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How the Fed Rate Hike Impacts Personal Loan Borrowers

If you plan to shop for a personal loan soon, the Federal Reserve rate hike means you may have to pay a slightly higher interest rate than you would have just a few months ago.

However, not everyone who borrows with a personal loan is doomed to higher costs. For example, if you already have a personal loan, chances are good that your rate will not increase.

Unlike credit cards, most personal loans do not have variable rates. Instead, a personal loan usually is tied to a fixed rate that does not change during the life of the loan.

That means that if you have an existing personal loan, it is unlikely that the Federal Reserve rate hike will cause you to pay more on your loan than you paid before the rate hike.

The situation is a bit different if your personal loan is tied to an adjustable rate, however. In that instance — just as with those who borrow using credit cards — your rate could begin to climb soon.

Looking Ahead at Interest Rates

For now, the Federal Reserve’s March 18 rate hike should have a modest impact on the cost of borrowing with a personal loan. The quarter-point hike is small, and while it may increase borrowing costs on new personal loans a bit, the effect shouldn’t be dramatic for most borrowers.

That is the good news. However, storm clouds are gathering for those who carry a lot of debt tied to variable rates, or who hope to take out a new personal loan later in the year.

Shortly after raising its rate on March 18, the Federal Reserve indicated it is likely to raise rates six times throughout the rest of 2022, and four more times in 2023. The Fed hopes this sustained increase in the federal funds rate will help it successfully tame today’s surging prices.

More recently, Federal Reserve Chairman Jerome Powell was even more adamant that the Fed may need to become aggressive in hiking rates.

The signal is clear: Multiple rate hikes — some potentially large — are on the way. That means you can expect borrowing with personal loans to get increasingly expensive as the year unfolds, and into 2023.

Should You Get a Personal Loan Now?

If you are in the market for a personal loan, now might be the right time to begin comparison shopping in hopes of finding the best deal. While rates may be a bit higher now than they were before the recent Fed rate hike, the increase should be modest.

However, if the Fed continues to hike rates throughout the rest of the year — and it clearly has said it plans to do so, at least unless or until conditions unexpectedly change — the cost of a new personal loan likely will increase.

Debt consolidation loans could be more attractive

Rising interest rates also might make a personal loan more attractive to those who have a lot of credit card debt. Credit card rates are variable, and they almost certainly will increase each time the Fed raises the federal funds rate. That means the interest you pay on credit card debt could increase sharply and steadily between now and sometime in 2023.

So, if you have the opportunity to take out a personal loan to consolidate your debt now — at a still-affordable rate — and use it to pay off your credit card debt today, you could net substantial savings if the rates on credit cards climb throughout the year, as is currently expected.

However, there is no one-size-fits-all advice here. Each person’s circumstances will differ. Although using a personal loan to pay off credit card debt now could make sense for some borrowers, it might be the wrong strategy for others.

If you are unsure of what you should do, seek out professional advice, such as from a nonprofit credit counselor or a fee-only financial adviser.

Bottom Line

Although lenders will set general parameters for the rates they charge on personal loans, your own financial circumstances play a large role in your odds of getting the best possible rate on a personal loan. If you have great credit and your overall debt load is modest, you likely will get the best rates on a personal loan.

Also, borrowing a smaller amount of money is likely to save you in interest costs, as lenders don’t feel as compelled to jack up the rate, since their risk on a smaller loan is lower.