December 11, 2022

Will personal loans become more expensive in 2022?

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They might for a big reason.

Key points

  • A personal loan allows you to borrow a lump sum of money for any purpose.
  • Although these loans are generally relatively affordable, they may come with higher interest rates this year.

When you need cash on the fly, whether it’s to pay for a car repair, a medical bill, or to fend for yourself during a period of unemployment, tapping 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 renovating your home, buying 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’ll earn by charging expenses to a credit card and paying them back 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 could 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 have the equity in it, you can take out a home equity loan or a line of credit (HELOC), both of which can have lower interest rates than a personal loan. You can also consider doing a cash refinance, where 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 higher your credit score, the 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 Ascent’s Best Personal Loans for 2022

The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.