If you need money, whether to cover home repairs, renovations or medical expenses, you might be inclined to turn to a personal loan. The advantage of personal loans is that you are not obligated to finance a specific asset, whereas with a mortgage, for example, you can only use the proceeds of your loan to finance the purchase of a house.
Personal loans also tend to offer the advantage of relatively affordable interest rates. And that’s important, because the lower the interest rate on your loan, the less money you spend when you borrow.
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But while it’s easy to see the appeal of personal loans, they may not be your best borrowing option next year. Indeed, personal loan interest rates could rise, making these loans a less affordable route than usual.
Why Personal Loan Interest Rates Might Rise
There are different factors that determine the rate you get on a personal loan. One factor is your credit score, and it is an important factor.
Since personal loans are unsecured, that is, they are not tied to a specific asset, lenders rely on your creditworthiness as a borrower when disbursing this money. The higher your credit score, the less risk a lender thinks it takes. And lenders tend to reward low-risk borrowers with lower interest rates.
But another factor that goes into personal loan interest rates is general market conditions. And there are reasons to believe that borrowing will be more expensive across the board next year.
The Federal Reserve has aggressively raised interest rates in an effort to calm inflation and give consumers some much-needed relief. When rates rise, people tend to borrow less money, which could lead to lower spending. And while that might sound like a bad thing, we actually need to slow down spending a bit so that supply chains can catch up with demand and prices can come down.
But while higher borrowing rates can help slow the pace of inflation, they are likely to make life harder for consumers, including by leading to higher monthly loan payments. And so that’s a good reason to potentially avoid a personal loan next year. Signing one could mean paying a lot more interest than usual.
Other borrowing options to consider
Although personal loans can be quite affordable, next year you could pay more. And so, if you’re a homeowner, it pays to compare personal loan rates to home equity loan rates and see which option gives you the most competitive borrowing.
Many people are sitting on large amounts of equity in their homes since property values are rising nationwide. And so if you’re in this boat, it’s worth seeing if a home equity loan will result in lower monthly payments than a personal loan.
On the other hand, if you don’t own a home, a personal loan could really become your most affordable bet in 2023 – even if you’re stuck with a higher rate through no fault of your own.
The Ascent’s Best Personal Loans for 2022
Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.
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