How the Interest Rate Hike is Impacting Personal Loan Borrowers
NEW YORK, May 26, 2023 (Newswire.com) - Credello: To combat inflation, the Federal Reserve ("The Fed") has raised its benchmark interest rates to levels not seen since the Great Recession. While these hikes are great for savings accounts and CDs, those considering getting a new personal loan are experiencing sticker shock at the new rates.
I already have a personal loan, is my interest rate increasing?
It depends on the type of loan you have.
Most unsecured loans that are already active and fixed-rate will not incur any interest rate changes. This goes for personal loans, consolidation loans, signature loans, etc. However, missing payments or defaulting on a signature loan or other unsecured loan could make you incur new interest rates as a penalty for the duration of the loan or until you're back in good standing. Check your loan's terms and conditions for details on what you should expect if you fall behind on payments.
Secured, fixed-rate loans like mortgages also shouldn't see any change to their interest rates. Again, this is only if you stay in good standing with the lender so it's critical you know the terms you've agreed to for your loan regarding when you could expect a change in your rate.
Variable-rate loans, both secured and unsecured, are loans that have fluctuating rates based on The Fed's benchmark rate. These are the loans that will most likely be affected by the increases made by The Fed.
How can I tell what type of loan I have?
Knowing the type of loan you have is critical for determining not only how much you'll pay in interest but how your loan is affected by market conditions. The easiest way to determine which type of personal loan you have, or are applying for, is to check the terms. However, there are a few quick ways to determine which loan you have (or could get):
1. Do you have to put any collateral up to get the loan? These are considered secured loans. The most popular types of secured loans are auto loans and mortgages. Unsecured loans don't require any kind of collateral and are often what you'll see for personal loans, signature loans, etc.
However, don't group all unsecured loans together as there are some significant differences between signature loans and personal loans you need to be aware of before applying.
2. Do you only see one interest rate listed? Typically, this means your loan is (or will be) a fixed-rate loan. However, check to see if there are any asterisks or fine print that specifies whether this could change.
3. Is it a credit card? Credit cards are unsecured, variable-rate ways to borrow money and will be affected by Fed rate hikes. There are some secured credit cards, too, and are also variable-rate.
A few tips to avoid interest rate increases
1. Look for promotional consolidation offers. Many lenders offer promotional rates that last for a limited time. Consolidating your debt into one loan can lower your interest rate, too.
2. Shop around. Rates can vary significantly from lender to lender, so compare rates before settling on a plan.
3. Make a payment plan. If you're not able to pay off your entire balance each month, making payments on time will help keep your interest rate lower and extend the life of your loan.
4. Pay more than your minimum payment every month. Even an additional $5 payment will help you avoid getting hit with higher rates that take longer to pay off.
The bottom line
Knowing your personal loan type and interest rate is key in determining how your loan will be affected by The Fed's interest rate hikes. Stay up to date on the terms of your loan to ensure you're not hit with unforeseen penalties or rates.
Credello is a financial tech company offering a personal finance tool that simplifies financial decisions through personalized, on-demand recommendations — so users can borrow, save, or invest with confidence. Credello believes that finding the right financial product should be as easy and interactive as online shopping, and we are on a mission to make that possible. For more information, please visit https://www.credello.com.