The Effects of Rising Personal Loan Rates on Borrowers

Prospective borrowers may experience higher monthly payments and lesser loan amounts as a result of rising personal loan rates.

Following the Federal Reserve’s numerous interest rate increases this year, personal loan rates from banks, credit unions, and internet lenders have increased.

By the most recent information from the Federal Reserve Bank of St. Louis, the finance rate on 24-month personal loans from banks increased from 8.73% in May to 10.16% in August. According to the National Credit Union Administration, the average annual percentage rate for 36-month credit union loans increased from 8.84% in June to 9.15% in September.

If you already have a personal loan, your monthly payments won’t alter. All because the majority of personal loans have fixed rates. However, compared to earlier this year, prospective borrowers may have to make larger monthly payments. And may only be eligible for smaller loan amounts.

Why Are the Rates on Loans Rising?

For several reasons, lenders have kept rates low up until lately.

Personal loan rates are somewhat influenced by supply and demand, which is why they don’t track the Federal Funds rate as closely as other financial products like mortgages do.

And this year there has been a lot of demand for personal loans. Partially because, in times of high pricing for nearly anything, personal loans are a desirable, fixed-rate financing option that can be utilized for almost anything.

But lenders might be under pressure from the Fed and the economy. A rising Fed rate may cause lenders to tighten their loan requirements and issue fewer loans overall. All due to concerns about an economic downturn, which would result in higher personal loan rates.

Does Being Approved for a Personal Loan Take Longer?

If lenders anticipate a recession, we believe they may tighten their underwriting standards.

Unsecured personal loans don’t require collateral. Therefore, lenders base their decision on an applicant’s credit history and financial situation to decide if they are likely to be repaid.

According to a credit industry study from TransUnion, personal loan delinquency rates—the percentage of all loans with past-due payments—have been progressively increasing this year and in the third quarter reached pre-pandemic levels.

The Unemployment Rate Has Stayed Low

Higher rates mean you might only be eligible for a smaller loan amount than you would have earlier this year. Even if lenders don’t tighten their approval standards.

Lenders consider your debt-to-income ratio. This is often known as how much of your monthly income goes toward paying off debt when determining whether to approve your application. In that estimate, they take into account the prospective personal loan payment.

Is Now the Right Time to Apply for a Personal Loan?

Although rates are rising for other financial products like credit cards and home equity loans, it’s still a good idea to shop around to find the best deal.

Those with adequate equity in their homes may qualify for 0% APR credit cards. And may also receive a better deal on equity financing than they would on a personal loan. Pay off the balance within the promotional period on a credit card with 0% interest to avoid paying a high rate.

Advice for Lowering Your Loan Rate

You might need to take additional steps to get a low rate due to rising APRs. Here are some suggestions from Your Part Time Accountant professionals to help you increase your chances of being approved for a low-interest loan.

  • Pre-qualify. You can check your loan’s size, interest rate, and length without affecting your credit by pre-qualifying. Pre-qualification is available from online lenders, banks, and credit unions. Even if your bank doesn’t, you can take a pre-qualified offer to it. And ask if it will beat that offer.
  • Think about using collateral or a co-applicant. Consider a co-signed, joint, or secured loan. Especially if your credit history or debt-to-income ratio could prevent you from receiving a low rate. An individual with superior credit and a greater salary is added to your application for a co-signed or joint loan. And they commit to repaying the debt if you are unable to. With a secured loan, you put up collateral in exchange for a reduced interest rate or a larger loan, but if you don’t make your payments on time, the lender may repossess the asset.
  • Improve your credit while paying off debt. Having strong or exceptional credit (a score of 690 or better) and a low DTI are the greatest ways to get a favorable rate. Pre-qualification may not be providing you with the offers you desire. So it’s time to look into alternate borrowing choices and start making debt repayments, which can improve your credit and lower your DTI.