What Rising Personal Loan Rates Mean for Borrowers

Annie Miller

Personal loan rates from banks, credit unions and online lenders are rising after repeated interest rate hikes from the Federal Reserve this year, the latest of which came last week.

The rate of finance on 24-month personal loans from banks jumped from 8.73% in May to 10.16% in August, according to the latest data from the Federal Reserve Bank of St. The average annual percentage rate on 36-month credit union loans rose from 8.84% in June to 9.15% in September, according to the National Credit Union Administration.

Most personal loans have fixed rates, so if you already have a personal loan, your monthly payments won’t change. But prospective borrowers may face higher monthly payments and may qualify for lower loan amounts compared to earlier this year.

Are personal loan rates rising?

Until now, lenders keep rates relatively low for several reasons.

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Personal loan rates are somewhat related to supply and demand, which is why they don’t follow suit Federal Funds rate It’s as close as other financial products like mortgages, said Werner Loots, US Bank’s executive vice president for direct consumer lending.

And demand for personal loans has been high this year, Loots said, in part because personal loans are an attractive fixed-rate financing option that can be used for almost anything at a time when prices are high for almost everyone.

The high demand has fueled competition among lenders, which have kept personal loan rates low even as the Fed rates have risen, said Salman Chand, TransUnion’s vice president of consumer lending.

But the Fed and the economic situation can put pressure on lenders. Fed rate hikes, coupled with fears of an economic downturn, could prompt lenders to tighten their lending criteria and make fewer loans overall, leading to higher personal loan rates.

“If you’re not getting a lot of loans and your borrowing costs are going up, there’s no incentive for you to keep going down and try to get more consumers through the door,” Chand said.

Is it harder to qualify for a personal loan?

Lenders can tighten underwriting criteria if they believe a recession is likely, Chand says.

Since unsecured personal loans do not require collateral, lenders rely on the applicant’s credit and financial profile to determine whether the borrower is likely to repay the loan.

The personal loan delinquency rate – the percentage of all loans that have past due payments – has risen this year, and in the third quarter surpassed pre-pandemic levels, according to a credit industry report from TransUnion.

Rising delinquency rates are one of the signals lenders use to decide to tighten approval standards, Chand says. If they do, consumers with fair or poor credit scores (generally below 689) may struggle to qualify.

Growing unemployment could also trigger tougher loan standards because lenders are worried about making loans to customers who may be laid off, says Katherine Fox, a Certified Financial Planner and founder of Sunnybranch Wealth based in Portland, Oregon.

So far this year, unemployment has remained consistently low.

Although lenders don’t specify their approval criteria, a higher rate means you may qualify for a lower loan amount than you had earlier this year, Fox said.

When deciding to approve your application, lenders look at how much of your monthly income goes toward debt payments, also called your debt-to-income ratio. They include potential personal loan repayments in that calculation.

For example, if a lender only accepts borrowers with a DTI under 40%, that means all of your current debt payments, plus your new personal loan payments, cannot exceed 40% of your monthly income.

Higher personal loan rates mean higher monthly payments, so lenders may approve you for smaller loans to avoid overdrafting, she says.

Is now a good time to get a personal loan?

Your current rate may not be as low as it was a few months ago, Fox says, but it could be higher.

If you plan apply for a personal loan in the coming months, it’s smart to shop around and lock in the speed before they go up again, he says.

For non-urgent expenses like home repairs and vacations, getting April is the most ideal means to wait. If prices do go down, it probably won’t for at least a few months, Fox said.

“It’s acting fast or really being flexible because that rate drop could be faster than we think or it’s going to take longer,” he said.

Rates go up on other financial products like home equity loans and credit cards, but it’s still smart to compare other options to see where you get the lowest rate, says Ian Bloom, CFP and owner of Open World Financial Life Planning in Raleigh, North Carolina. .

Those who have enough equity in their home can get a better rate on equity financing than they would on a personal loan, and consumers with strong credit can qualify for a 0% APR credit card, he said. With a zero-interest credit card, pay off the balance during the promotional period to avoid high rates.

Tips to lower your personal loan rate

Rising APRs mean you may have to take more steps to get low rates. Here are some tips to increase your chances of qualifying for an affordable loan.

Pre-qualification. Pre-qualification allows you to check the amount of your personal loan, cost and repayment terms without ding your credit. Online lenders, banks and credit unions offer pre-qualification – and even if your bank doesn’t, you can take a pre-qualified offer and ask if it will beat the offer.

Consider co-applicants or guarantees. If your credit or DTI can prevent you from getting a low rate, consider a co-signed, joint or secured loan. With a co-signed or joint loan, you add someone with better credit and higher income to your application, and they promise to repay the loan if you fail to do so. With a secured loan, you provide collateral in exchange for a lower rate or larger loan, but the lender can take the property if you miss a payment.

Build your credit and lower your debt. The best way to get a good rate is to have good or excellent credit (score of 690 or higher) and a low DTI. If you don’t get the offer you want through pre-qualification, it’s time to consider alternative loan options and move on pay the debtwhich can build your credit and lower your DTI.

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