How Fed Rates Affect Your Personal Loans
Earlier in December, the US Federal Reserve announced that it would raise its benchmark interest rate by 0.25% to 0.75%, moving it further away from the near-zero rate it had been stuck at since the last financial crisis. While much ink was spilled debating its effect on financial markets, banks, and businesses across the world, less attention has been paid to the decision’s impact on individuals in the United States.
The Fed’s interest rate changes the cost of borrowing for banks, which in turn pass along these higher rates to consumers. This interest rate adjustment influences everything from credit card rates to mortgages and loans to the interest rate paid on savings accounts. While the rate increase was very incremental, the Fed has signaled that it plans to raise its rates at least three more times in 2017. This development has caused many prospective borrowers to consider the potential implications for their rates and payments.
Will Personal Loan Rates Increase?
The major concern for the average person about the Fed raising interest rates is how it will affect financing costs. Marketplace loans are an excellent alternative for many people who are trying to avoid the complicated and bureaucratic process of getting a bank loan. One of the biggest appeals, though, are the friendly rates many companies offer, and the ease of getting funds once approved.
Most experts agree that interest rates are likely to go up across the board for most credit products. As banks must pay more to borrow, they will pass those costs on to the consumer. Personal loan rates, which had been steadily on the decline for most of 2016—down from 11.09% in December of last year to lows of 10.64% this year—are also likely to be affected. Indeed, rates have already moved marginally higher to 10.68%.
However, it is not all bad news for average consumers. Markets and businesses had foreseen this interest rate hike, and had adjusted their rates accordingly. For most households, the effects have already begun to be absorbed, even if only gradually. Furthermore, for savers, the gradual increases present an opportunity to finally improve earnings on deposits as rates are adjusted higher.
Regardless, with three more rate hikes on the horizon, it is increasingly apparent that the era of super-low rates has come to an end. Although the Fed rate is still far from peaks of nearly 10.00%, the state of the economy means that rates will continue inching higher for the foreseeable future. Fortunately for consumers, there are several factors that still work in their favor when looking for low interest-rate personal loans.
Low Rates Are Still Possible
While consumers can expect to see interest rates gradually increase over the coming years, there are numerous tailwinds working in their favor when it comes to accessing the most affordable borrowing rates. For one, the amount of personal loan options available makes it harder for rates to rise significantly as lenders compete for business.
Moreover, not all rates will be directly affected by the Fed’s actions. Those loans and credit options with fixed rates will remain unchanged, although debt with variable rates will likely see gradual increases. Nevertheless, high rates are not a full barrier to borrowing according to some.
In the eyes of many analysts, the high level of saturation in the industry works in favor of consumers thanks to a greater number of borrowing options. Lenders, who do not want to exclude potential borrowers, are also unlikely to scale rates higher to the point at which they become unfavorable for borrowers. Additionally, there are things potential borrowers can do to help keep their interest rates as low as possible.
Experts have offered several solutions for consumers concerned about the potential of rates increasing. One of the most common recommendations experts make to consumers is to focus on their own creditworthiness. Specifically, many industry veterans advise their customers to focus on improving their credit scores in order to qualify for better rates and terms. Additionally, in such a crowded competitive space, consumers are encouraged to shop around for the best personal loan terms.
Regardless of the broad economic impact of a rate hike, there are likely to be repercussions across the loan industry. From variable rates to the cost of mortgages, credit will become marginally more expensive over time. However, as experts have noted, consumers can take steps to avoid this, and still access attractive interest rates in the personal borrowing space.