Will personal loans become more expensive in 2022?

Image source: Getty Images

When you need cash on the fly, whether it’s to pay for a car repair, a medical bill, or to get by during a period of unemployment, tap into your emergency fund is usually your best bet. But if you don’t have money in savings, a Personal loan might be your next best option.

A personal loan allows you to borrow money for any purpose. You can take out one to cover a surprise bill, or you can take out a personal loan for a non-urgent matter, like renovate your housebuying furniture or upgrading some electronics.

The advantage of personal loans, besides their flexibility over how you spend your money, is that they tend to charge relatively competitive interest rates. In fact, you’ll usually pay a parcel less interest on a personal loan than you will earn by charging expenses to a credit card and repay it over time. But this year, a personal loan could cost you more for one important reason.

Borrowing rates could go up everywhere

This year, consumers may end up paying more money to borrow in many ways, from personal loans to mortgages to credit cards. The reason has to do with the Federal Reserve’s plan to raise its federal funds rate.

After keeping interest rates unchanged for several years to fuel the country’s economic recovery from the COVID-19 outbreak, the Fed announced its intention to raise interest rates this year. Now, the Fed doesn’t actually set consumer interest rates. Rather, it determines the interest rates that banks charge each other for short-term borrowing.

However, the decisions of the Fed can certainly influence the evolution of consumer interest rates. And so there is a good chance that interest rates on personal loans will rise this year, in the same way that we can expect interest rates to rise slightly in other categories of borrowing.

Should you take out a personal loan this year?

If you need to borrow money anytime in 2022, you can consider a personal loan. But before you apply, ask yourself if there is a more affordable way to access the money you need.

If you own a home and own the equity in it, you could purchase a home equity loan or line of credit (HELOC), both of which can charge less interest than a personal loan. You might also consider making a cash refinancewhere you borrow more than your existing mortgage balance and get the excess money in cash to use as you see fit.

If you don’t own a home, you may find that a personal loan is your most affordable option for borrowing money. But you should also know that the more your credit scorethe more likely you are to get a competitive interest rate on a personal loan – and be approved for a loan in the first place.

That doesn’t mean you can’t qualify for a personal loan if your credit isn’t that good. But if you go this route, you could end up paying a lot of interest, while a higher score will generally make taking out a personal loan more affordable.

The best credit card cancels interest
If you have credit card debt, transfer it to this top balance transfer card can let you pay 0% interest for 18 months! It’s one of the reasons why our experts rate this card as a top choice to help you control your debt. This will allow you to pay 0% interest on balance transfers and new purchases during the promotional period, and you will not pay any annual fees.
Read our full review for free and apply in just two minutes.

We are firm believers in the Golden Rule, which is why editorial opinions are our own and have not been previously reviewed, approved or endorsed by the advertisers included. The Ascent does not cover all offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.