What rising personal loan rates mean for borrowers

The interest rates for personal loans from banks, credit unions, and online lenders have risen after repeated interest rate increases by the Federal Reserve this fiscal year.

According to the Federal Reserve Bank of St. Louis, the finance rate for 24-month personal loans from banks increased from 8.73% to 10.16% in May to August. According to the National Credit Union Administration, the average annual percentage rate for 36-month credit union loans increased from 8.84% to 9.15% between June and September.

Personal loans usually have fixed rates. If you have an existing personal loan, your monthly payment won’t change. Prospective borrowers may have to pay higher monthly payments, and could be eligible for lower loan amounts than they did earlier in the year.

Rates were kept low by lenders until recently.

Personal loan rates can be somewhat tied to demand and supply. This is why they don’t follow the Federal Funds rate as closely, according to Werner Loots (U.S. Bank’s executive vice-president of direct consumer lending).

Personal loans have been in high demand this year. This is partly because personal loans offer a fixed-rate, attractive financing option that can be used to finance almost any item at a time where prices are high.

The high demand for personal loans fueled competition among lenders. This kept personal loan rates low even though the Fed rate rose, according to Salman Chand (Vice President of Consumer Lending at TransUnion).

Lenders could be under pressure due to the Fed and the economic state. In the face of rising Fed rates and fears of an economic downturn lenders may be forced to tighten their borrowing criteria. This could lead to fewer personal loans and higher interest rates.

Chand states that if you don’t make as many loans or your borrowing costs are going up, you have no incentive to lower rates and to try to get as many customers through the door.

If they think a recession is likely to occur, Chand suggests that lenders could tighten their underwriting criteria.

Unsecured personal loans are not secured and lenders use applicants’ financial information to assess whether they can repay the loan.

The percentage of personal loans with past-due payments has been steadily increasing this year. According to TransUnion’s credit industry report,

Chand states that lenders can use rising delinquency rates to determine whether they need to increase approval standards. Consumers with low credit scores, generally below 689, could be denied eligibility if they do.

Increasing unemployment could lead to tighter borrowing standards. Lenders are concerned about making loans for consumers who may be laid off. Katherine Fox, a certified financial advisor and founder of Sunnybranch Wealth, is based in Portland.

The unemployment rate has remained low so far in this year’s campaign.

Even though lenders aren’t tightening their approval criteria, higher rates could mean that you might be eligible for a smaller loan amount than you would have previously this year, Fox reports.

Lenders will assess how much of your monthly income is used to pay your debt payments. This is also known as your debt-to–income ratio. In that calculation, they also include the possibility of personal loan payments.

If a lender accepts borrowers with DTIs under 40%, it would mean that all your debt payments and your personal loan payment wouldn’t exceed 40% of your monthly income.

Higher personal loans rates translate into higher monthly payments. A lender might approve you for a smaller loan in order to keep you from overextending yourself.

The current rate may not be as low today as it was a few months back, Fox states, but it could rise.

You should shop around for personal loans before rates rise again. HTML3_

Waiting is the best way to get the best APR for non-urgent costs like vacations and home improvements. Fox states that rates will not fall for at least a few more months if rates are to continue falling.

“It’s either be fast or flexible, because that rate fall might come sooner or later than we think or it might take,” she said.

While rates are higher for other financial products such as home equity loans or credit cards, it is still smart to compare the other options to find the best rate. Ian Bloom, CFP, owner of Open World Financial Life Planning, Raleigh, North Carolina, states that

He says that those with sufficient equity in their home may be eligible for equity financing at a lower rate than they would on personal loans. Consumers with good credit may also qualify for a credit card with a 0% APR. To avoid paying a high interest rate, get a zero-interest credit cards and pay the balance within the promotional period.

You may need to take additional steps to obtain a lower rate due to rising APRs. These are some ways to increase your chances of getting a loan at a reasonable rate.

Pre-qualify. This allows you to check the amount, rate, and repayment terms of your personal loan without having to affect your credit score. Pre-qualification is available from online lenders, credit unions, and banks. You can also ask your bank if they offer it.

A co-applicant, or collateral, is a person who can help you get a lower rate. A co-signed loan or joint loan allows you to add someone with higher credit and income to your application. They also promise to repay the loan in case you default. Secured loans allow you to provide collateral for a lower or larger loan amount, and the lender may take title to the property if you fail to make payments.