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What Happens To Personal Loan Rates Once The FOMC Starts To Raise Interest Rates This Year

Feb 14

The Federal Reserve - also known as the Fed - is going to raise interest rates this year, and personal loan recipients could be in for a rude awakening. When the Fed convenes in March of 2022 and raises interest rates, there is now likely to be a half of point increase in the prime lending rate. That means everything that has a variable interest rate will get more expensive.

All Loans with Variable Rates are Likely to Become More Expensive in 2022

Financing that will be impacted by increased interest rates includes home equity loans, credit cards, unsecured and personal loans. The Federal Reserve's decision to raise interest rates will affect the personal loans that are offered by banks directly. Before the rate hike, borrowers were paying between 5% and 7%. Once the Fed starts raising interest rates, those with unsecured loans can expect their costs to rise by about 1%. For example, someone who currently has a loan at 6%, might soon see it increase to about 7.5%. Those with credit cards outstanding can also expect an increase in the rates they pay over time.

Home Equity Loans May Be Affected First

There is another variable lending option available for consumers called home equity lines of credit (HELOC). These HELOCs allow homeowners access to cash which they can borrow against their homes' equity. This type of loan is popular because it does not require a traditional credit check. However, rates on these loans are variable and repayment terms can be short-term or long-term. Since lenders do not perform a credit check to issue the loans, they could make the decision to raise interest rates simply based on their own market conditions. It is common for HELOCs to be pegged to underlying home equity indexes such as LIBOR - London Interbank Offer Rate - and Fed Funds Rate which will both see increases when the Federal Reserve raises its benchmark rate.

The increase in the Federal Funds Rate will slowly push up card rates until they reach their peak level—which is typically stated in the cardholder agreement and contract. If your credit card has an introductory rate, you could still see this dwindle down to a lower rate as time goes on. However, if your credit card has a fixed interest rate, expect it to gradually increase over time until it hits its most expensive point.

Finally, short-term finance loans such as personal loans will become more expensive next year with interest rates set to rise because these lenders will not be able to justify offering lower rates than banks do. While most unsecured personal loans offer up to about $25,000 worth of funding; they may only carry APRs (annual percentage rate) between 13% and 20%. This means that if Federal Reserve raises interest rates even higher.