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Paying off a personal loan, or interested in getting one? The Fed’s recent rate cut could be good news for you.
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The Federal Reserve recently cut interest rates by a quarter of a percentage point, while also signaling more cuts later this year. And personal loan rates closely follow the “benchmark rate” set by the Fed. A drop in the Fed rate will likely lead to an (eventual) drop in personal loan rates.
Here’s what the Fed’s recent rate cut means for your new or existing loan.
A rate cut’s impact on new loans
A decreased Fed rate makes it cheaper for banks and lenders to borrow money, which can mean better terms (i.e., lower interest rates) on new personal loans.
A drop of 0.25 percentage points is pretty modest, though, and interest rates are still near recent highs. Also, the Fed rate isn’t the only consideration: There are tons of other things that lenders factor into a loan — most importantly, the borrower’s credit score and payment history.
Still, with more rate cuts potentially coming later this year, there could soon be much better terms for borrowers. Just don’t expect any instant or dramatic changes.
A rate cut’s impact on existing loans
The effect of a Fed rate cut on your existing loan depends on what type of loan you have — a variable-rate loan or a fixed-rate loan.
- Variable-rate loans: Loans with an APR that can change. In the case of a Fed rate cut, the APR on a variable-rate loan would drop, too (but it may be gradual or modest).
- Fixed-rate loans: Loans with an APR that doesn’t change. With a fixed-rate loan, your monthly payments remain the same, no matter what the Fed does.
In the case of a fixed-rate loan, a Fed rate cut is a great time to consider refinancing: replacing your existing loan with a new, better one.
Even though it usually comes with an upfront fee, refinancing can help you save by lowering your interest rate and monthly payment. And if rates keep falling, refinancing will become a more and more appealing option.
Want to refinance today? See our list of the best personal loans available to get started now.
Other things to consider
A rate cut matters, but it isn’t the only factor in personal loan rates. Keep in mind that:
- Changes take time: Lenders don’t usually cut rates immediately. It may take weeks or months for borrowers to see an effect.
- Credit score still rules: The best rates will always go to borrowers with a strong credit history, steady income, and minimal debt.
- There are other big-picture factors: Inflation, employment, and broader economic outlook influence loan rates, too.
Also remember that the Fed expects to make more cuts later this year. Whether you’re looking to take out a new loan or refinance an existing one, a wait-and-see approach might be best.
Whatever happens next, now’s a great time to:
- Monitor rates from different lenders.
- See if refinancing could lower your existing loan rate.
- Keep strengthening your credit score to get better terms.
Ready to explore your options? Compare personal loan rates from top lenders today to see if one is right for you.
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