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Will Personal Loan Rates Go Up With Rising Federal Interest Rates

Dec 13

Federal interest rates are on the rise, but personal loan rates may not be following right behind.

The federal funds rate is a key interest rate used to determine how much banks charge for personal loans. As of July 2021, the federal funds rate remains at an all-time low near zero percent while personal loan rates, if any, typically range between 3%-10%. However, there does not seem to be much movement in personal loan rates even with the Federal Reserve's plan for short-term interest rates to reach 2% by 2023.

The reason why personal loan interest rates remain fairly stagnant despite rising federal interest rates is that personal loan interest rates are determined by personal credit scores. As personal credit reports remain generally strong, personal loan interest rates remain generally low.

FAQs

 

1.) What is a personal loan?

A personal loan is a type of debt financing that is typically used to consolidate debt or pay for large expenses not covered by insurance or other options. Unlike taking out a home equity line of credit, loans are unsecured debts backed only by the borrower's promise to repay, making them less risky for lenders. Loans can come with fixed or variable interest rates, depending on the type of loan you choose and your financial situation. [2]  Typically personal loans do not require collateral such as real property, but it depends on the personal loan company.

2.) How can personal loans help?

By consolidating debts, personal loans can simplify repayment and save you money by paying off previous loan balances at their higher interest rates. You also may find it easier to pay back a personal loan than several bills each month. Personal loans are particularly helpful if your poor credit makes you ineligible for other financing options like bank loans or credit cards (and even then banks often offer personal loans to the well-qualified). [3]  Personal loan rates are not affected by credit scores, which is why personal loan rates remain fairly low while federal interest rates continue to rise.

Personal loans are different than other types of borrowing like mortgages or credit card debt.

Personal loans are generally considered installment loans where borrowers

3.) Where do I get a personal loan?

If you're approved for a personal loan from a personal bank or financial institution, you can use it for pretty much anything you want - debt consolidation, home improvement, a personal vacation; the sky's the limit. However, personal loan rates may vary depending on where you get your personal loan. Personal loan rates will depend on factors such as your credit score and history, income level, and debt-to-income ratio (DTI). Although some personal loan rates are based on credit scores, most lenders don't require a minimum score to apply and only look at DTI to determine creditworthiness.

4.) Why won't the personal loan interest rates go up?

Personal loan interest rate is not affected by federal interest rates because personal loans are unsecured debts that rely more heavily on personal loans are different than other types of borrowing like mortgages or credit card debt. Personal loans are generally considered installment loans where borrowers' personal loan rates are not affected by credit scores, which is why personal loan rates remain fairly low while federal interest rates continue to rise.

5.) What personal factors determine the personal loan interest rate?

Although some personal loan rates are based on credit scores, most lenders don't require a minimum score to apply and only look at DTI to determine creditworthiness. Personal loan interest rates depend on factors such as your credit score and history, income level, and debt-to-income ratio (DTI). If you have good personal credit, you'll likely qualify for the lowest personal interest rate possible since loans require no collateral or assets. Your bank or financial institution may also offer discounts if you use direct deposit or set up automatic repayments.