The Federal Reserve has kept its benchmark rate close to zero since March 2020 to spur economic recovery amid the COVID-19 pandemic. But with record annual inflation and a strong labor market, the Fed plans to implement several rate hikes in 2022 starting this month.
When the central bank raises the federal funds rate, interest rates are likely to rise slightly on a number of financial products, including credit cards, private student loans, home equity lines of credit and personal loans.
Keep reading to learn more about the impact of Fed economic policy on personal loan rates, as well as how to get a low interest rate on a personal loan. One way is to compare rates from multiple lenders at once on Credible’s online marketplace.
WHAT THE NEW FED ECONOMIC POLICY MEANS FOR MORTGAGE RATES
What the Fed’s rate hikes could mean for personal loans
Lenders set consumer borrowing rates based on the prime rate, which is an economic index that tracks the rates banks charge their most creditworthy commercial borrowers. The prime rate is largely influenced by the federal funds rate.
A group of senior Fed policymakers on the Federal Open Market Committee (FOMC) determines the federal funds rate, altering the central bank’s economic policy to suit current conditions. The FOMC is closely watching inflation, which rose to an annual rate of 7.5% in January, nearly triple the Fed’s 2% target.
Fed Chairman Jerome Powell told lawmakers last week he would propose a quarter-point rate hike at the March 15-16 FOMC meeting to rein in high inflation. He added that Fed officials are “ready to act more aggressively by raising the fed funds rate by more than 25 basis points” in future meetings.
“With inflation well above 2% and a strong labor market, we believe it will be appropriate to raise the target range for the fed funds rate at our meeting later this month,” Powell said.
Upcoming rate increases will affect the prime rate and will likely result in higher borrowing costs for a number of consumer debt products, including personal loans. Average personal loan rates hit all-time lows at the end of 2021 in part due to the Fed’s moderate economic policy, but may start to rise following rate hikes in 2022.
Although personal lenders consider the prime rate, they rely more on other factors such as the applicant’s credit score and debt-to-income ratio (DTI) to determine interest rates. And since rates vary from lender to lender, it’s important to compare multiple lenders.
You can visit Credible to compare personal loan rates that are right for you for free without affecting your credit score.
PERSONAL LOAN RATES ARE MUCH LOWER IN 2022 THAN THEY WERE A YEAR AGO, DATA SHOWS
How to get a low personal loan rate
While the Fed’s rate hike in March may impact average personal loan rates, there are a number of factors within your control that lenders consider when setting interest rates. Personal lenders rely heavily on your creditworthiness, including your credit score and DTI, to determine your interest rate and eligibility.
Applicants with very good to excellent credit, defined by the FICO scoring model as 740 or higher, will see the lowest personal loan rates. On the other hand, those with bad credit may see higher rates – if they qualify.
Here are some tips for getting a low interest rate on a personal loan:
- Work on building your credit score. Improve your on-time payment history and reduce your credit utilization, which is the amount of revolving debt you owe relative to the credit limit you have. Also consider signing up for free credit monitoring services on Credible.
- Reduce your debt burden. Ideally, lenders like to see a DTI ratio of 36% or less. If you have excessive levels of debt, consider using cash flow such as tax refunds and work bonuses to pay off your current loans. Alternatively, you can research ways to increase your income.
- Shop with multiple lenders. Most personal lenders allow you to prequalify to see your estimated interest rate with a soft credit inquiry, which won’t affect your credit score. This way, you can purchase the lowest fare possible.
You can browse the current personal loan rates in the table below. Then you can visit Credible to be prequalified by multiple lenders at once, so you can search for the best deal for your financial situation.
FORECAST: HERE’S WHAT THE HOUSING MARKET WILL LOOK LIKE IN 2022, ACCORDING TO AN EXPERT
Do you have a financial question, but you don’t know who to contact? Email the Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.