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Taking Out a Personal Loan in a Rising Rate Environment

woman reviewing financial document sitting on couch

Even after recent increases, we are currently in a historically low interest rate environment.

We can’t predict how much more, or if, rates will continue to rise or how exactly we’ll be affected, so this may still be an opportunity to take advantage of the rate environment when it comes to personal loans.

While personal loan rates are generally determined primarily by the applicant’s credit history, according to this NerdWallet report, if federal interest rates continue to go up, so too could rates on personal loans.

Based on historical data, there is the chance that federal interest rates will continue to rise from here, as they were as high as 20% in 1980.

Reviewing federal funds rates

A personal loan typically offers a fixed rate, meaning whatever rate you borrow money at today won’t be affected by interest fluctuations in the future.

There are two primary interest rate variables to consider with a personal loan:

1. It May Be Less Expensive to Take Out a Personal Loan

Did you know that receiving a fixed rate personal loan for unexpected expenses such as vehicle repair or healthcare may be available to you? Or you might consider one for a much needed family vacation, or paying off a few bills.

Whatever the reason, now may still be a compelling time to consider a personal loan for your specific situation.

By locking in a fixed rate, you can at least give yourself some certainty about what you’ll be paying in the months or years to come.

2. Combining Your Debts Into One Loan

Perhaps you were recently unemployed, had unexpected medical expenses, or simply lost sight of your bills. Regardless of the reason, it could be a good time to consider consolidating your debt into one more easily manageable payment.

Attempting to keep track of all your accounts can be difficult, so a personal loan could allow you to move high-interest debt into one monthly payment at a lower rate.

Simplifying your financial life and lowering your overall interest rate could save you time and money going forward.

More Background on the Fed

It may be helpful to understand some context on how federal interest rates work generally.

If you were to ask an everyday person what’s happening with interest rates, they might say it’s because of “The Fed” or The Federal Reserve System.

According to the Board of Governors of the Federal Reserve System, the purpose of the Fed is to set monetary policy that stabilizes the U.S. economy and overall financial system.

 “The Fed” is responsible for 4 major categories:

  1. Conducting monetary policy such as influencing credit rates
  2. Supervising and regulating banks and financial institutions
  3. Maintaining stability in our financial system
  4. Providing financial services to the U.S. government

The “Fed funds rate” is the primary tool used by the Fed to control the interest rate banks charge each other, and therefore how likely they are to lend money to consumers or other businesses. It also impacts how high or low rates will be for borrowers.

Hopefully this overview gives you a bit clearer picture on how interest rates work.