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Inflation has been a problem since the second half of 2021. And while it’s been declining steadily since peaking in June of 2022, we still have a long way to go before inflation reaches what the Federal Reserve considers a normal or manageable level.
In April, the Consumer Price Index (CPI), which measures changes in the cost of consumer services and goods, rose 4.9% on a year-over-year basis. It also rose 0.4% compared to March.
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Here’s why that’s a problem, though. The Fed has made it clear that it wants to see inflation dip back down to the 2% mark. The Fed has firmly held that 2% inflation is needed to create a stable economy.
As such, the Fed is likely to implement another interest rate hike at its next meeting in an attempt to bring inflation levels closer to 2%. And that’s not a good thing for personal loan borrowers.
The Federal Reserve is not in charge of setting consumer borrowing rates. Whether you’re taking out a mortgage, an auto loan, or a home equity loan, ultimately, it’s your individual lender that will decide what interest rate to attach to your loan.
Rather, the Fed is in charge of the federal funds rate, which is what banks charge each other for short-term borrowing purposes. But when the Fed raises its federal funds rate, the cost of consumer borrowing tends to increase. And that means personal loan borrowers are likely to be impacted by the latest inflation data.
To be clear, if you’re in the process of paying off an existing personal loan, any additional rate hikes that occur this year shouldn’t affect you. That’s because personal loans commonly come with fixed interest rates, so your monthly loan payments shouldn’t change even if the Fed raises its federal funds rate again.
However, if you’re planning to take out a personal loan in the near term, another rate hike could make it so that loan is more expensive to sign. As such, you may either want to put a personal loan in place now, before the Fed has another opportunity to raise interest rates, or you may want to make the decision to hold off on borrowing altogether.
Even without another Fed rate hike, right now, you’re generally looking at a higher interest rate on a personal loan than what you would’ve been in line for a year ago. So if you’re able to wait on borrowing money, you might put yourself in a position to finance your next big project or purchase at a lower cost.
Maybe you’re looking at signing a personal loan to pay for a much-needed home repair you can no longer put off. In that scenario, waiting a year to sign a personal loan may not be feasible for you.
Still, you can increase your chances of snagging the most competitive interest rate available on a personal loan by going in with a high credit score. Personal loans are unsecured, so they’re not tied to a specific asset the way a mortgage is. As such, lenders need to be cautious when giving out these loans.
If you come in with a strong credit score — one in the upper 700s or higher — it sends the message to lenders that you’re a reliable borrower. That might result in a more affordable interest rate than someone with a lower score.
A couple of things you can do to boost your credit score fairly quickly are check your credit report for errors (and get mistakes corrected if they’re harmful to your credit history) and pay off a chunk of existing credit card debt. However, if you’re in a position where you need a personal loan, then chances are, you don’t just have a pile of cash on hand to knock out a credit card balance.
Of course, paying your bills on time is a really good way to boost your credit score. But that can take time. And you may not have so much time if your need for a personal loan is pressing.
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