Personal Loan Rates & Trends, Week of May 22: Rates Jump

Personal loan rates jumped markedly this week after declining steadily over the prior three weeks. The overall rate spiked 51 basis points to 21.08%, surpassing the 21.00% threshold for the first time since Investopedia began tracking rates. The average annual percentage rate (APR) on personal loans first surpassed the 20.00% mark the week of April 10.

Rates segmented by credit tier show that the average APR for those with excellent credit decreased by 66 basis points, while those with fair credit experienced a significant jump of 184 basis points after experiencing an even larger decline of 286 basis points the week before. Borrowers with bad credit saw a further 64-point decrease in rates this week on the heels of a 142 basis point drop in average APR last week. Rates for those with good credit remained relatively flat, with a modest 6 basis point increase.

Personal loan rates began rising over the course of 2022 and in 2023 due to a sustained series of interest rate hikes by the Federal Reserve. To fight the highest inflation rates seen in 40 years, the Fed not only raised the federal funds rate at each of its last 10 rate decision meetings, but it often hiked the rates by historically large increments. Indeed, six of those increases were by 0.50% or 0.75%, though the last three increases were more modest at only 0.25%.

The Federal Reserve and Personal Loan Rates

Generally speaking, moves in the federal funds rate translate into moves in personal loan interest rates, in addition to credit card rates. But the Federal Reserve's decisions are not the only rate-setting factor for personal loans. Also important is competition, and in 2022, the demand for personal loans increased substantially.

Though decades-high inflation has caused the Fed to raise its key interest rate by approximately 500 basis points since March 2020, average rates on personal loans haven't risen that dramatically. That's because high borrower demand required lenders to aggressively compete for closed loans, and one of the primary ways to beat the competition is to offer lower rates. Though personal loan rates did increase in 2022 and into this year, fierce competition in this space prevented them from rising at the same rate as the federal funds rate.

Inflation is beginning to chill, though it remains relatively high. As a result, Fed officials are divided on whether an 11th rate hike in June is necessary to tame inflation. The Fed raised the fed funds rate by just 25 basis points after its meeting in May, and now, the majority of futures traders predict there will be a pause on rate changes in June. The Federal Reserve's next rate-setting committee meeting will conclude on June 14.

What Is the Predicted Trend for Personal Loan Rates?

If the Fed raises the federal funds rate higher in 2023, personal loan rates could also increase. However, with competition for personal loans still stiff, upward movement in loan rates could be dampened even in light of an increased federal funds rate, perhaps leaving averages not far from current levels.

Because most personal loans are fixed-rate products, all that matters for new loans is the rate you lock in at the outset of the loan (if you already hold a fixed-rate loan, rate movements will not affect your payments). If you know you will certainly need to take out a personal loan in the coming months, it's likely (though not guaranteed) that today's rates will be better or similar to what you could get in June, July, or even September, depending on how rates react to any Fed rate hikes or pauses.

It's also always a wise move to shop around for the best personal loan rates. The difference of 1 or 2 percentage points can easily add up to hundreds or even thousands of dollars in interest costs by the end of the loan, so seeking out your best option is time well invested.

Lastly, don't forget to consider how you might be able to reduce your spending to avoid taking out a personal loan in the first place, or how you could begin building an emergency fund so that future unexpected expenses don't sink your finances and necessitate taking out additional personal loans.

Rate Collection Methodology Disclosure

Investopedia surveys and collects average advertised personal loan rates, average length of loan, and average loan amount from 15 of the nation's largest personal lenders each week, calculating and displaying the midpoint of advertised ranges. Average loan rates, terms, and amounts are also collected and aggregated by credit quality range (for excellent, good, fair, and bad credit) across 29 lenders through a partnership with Even Financial. Aggregated averages by credit quality are based on actual booked loans.