Consumer borrowing rates could rise in 2022. Will personal loans stop making sense?

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Borrowers may need to be prepared for higher costs.


Key points

  • Personal loans are a flexible way to borrow.
  • But if loan interest rates rise, they could become less attractive.

There are different types of loans you might be looking to take out at some point in your life, and some may be more or less flexible than others. When you take out a car loan, for example, you can only use the proceeds of your loan to buy a car. Likewise, you can only use a mortgage to buy a house.

Personal loans work differently. The advantage of personal loans is that they allow you to borrow money for any purpose.

Need money to start a small business? A personal loan could be used as capital. Do you want to update the furniture in your home or make improvements? A personal loan could make this possible. Heck, you can even take out a personal loan and splurge on a Caribbean cruise if you want (though to be clear, borrowing money to take a vacation is a generally unwise idea).

But as 2022 progresses, personal loans could become more expensive. And once that happens, they may not make sense to some borrowers.

Why Personal Loan Rates Might Rise

The Federal Reserve plans to raise its federal funds rate several times this year. This is the rate banks charge each other for short-term borrowing.

Although the Federal Reserve does not set consumer interest rates, its actions tend to influence them. When rate hikes occur, consumer borrowing tends to become more expensive. This means that mortgage rates tend to rise, credit card interest rates tend to rise, and personal loan rates tend to rise. It’s all part of a big pattern. As such, personal loans may become less and less affordable as 2022 approaches.

Will a personal loan be a viable borrowing option for you this year?

Whether a personal loan will end up making financial sense for you this year will depend on a variety of factors, including why you want to borrow the money and what other borrowing options you have. If you have a really urgent need to borrow money – for example, to make home repairs that can’t be postponed – then going ahead with a personal loan might make sense later this year, even if it means registering to pay more interest.

On the other hand, if you have borrowing options available to you outside of a personal loan, it might be worth looking into them. You may, for example, own a home with a lot of accumulated equity. In this case, you might be able to get a lower interest rate on a home equity loan compared to a personal loan.

You may also have someone in your life who is willing to lend you money. Let’s say you have a sibling who is more than comfortable and you need to do a $2,000 roof repair that can’t be postponed. Your sibling may be able to lend you this money interest free or at a very low rate, so that would be something to consider as well.

All told, it might still make sense to take out a personal loan later this year, even as borrowing rates rise across the board. But it’s also wise to explore other borrowing options before going down this path.

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