If you are in the market for any kind of loan in 2024, you might be surprised by what it costs. Inflation and interest rates have risen dramatically in the last two years. The Federal Reserve has increased the federal funds rate many times in recent months to fight surging inflation. While inflation has begun to cool as of 2024, prices for many goods are elevated and interest rates are much higher than two years ago.
Personal loans have not been immune to the effects of interest rate increases and inflation. These days, the average rate for a personal loan is around 11%, which is higher than a few years ago, but is much less than average credit card rates at approximately 20%.
Personal Loan Balances Surging, Transunion Reports
Transunion reported at the end of 2022 that many consumers are turning to personal loans to stave off financial pressures from inflation. The credit agency states that unsecured personal loans have experienced record growth in balances and loan originations in the last year. This has been fueled largely by large lending increases to people with average or less than average credit.
Why People Get Personal Loans In Inflationary Times
Nobody likes paying more interest on any loan they have. But at some times, taking out a personal loan, even at a higher rate, can be beneficial to your finances. If you need cash and don’t want to risk collateral, taking out a personal loan may be the way to go, even if you have to pay higher interest than years ago.
Credit Cards
As the Fed has hiked interest rates, the average interest rate for credit cards has surged. Some credit cards have an interest rate approaching 30%! If you have a credit score above 650 or 670, you may be able to score a personal loan with an interest rate that is much lower. For that reason, many Americans are transferring their credit card balances to personal loans.
Personal Loan Rates Are Fixed
This point is related to the above because most credit cards have variable rates that change with market rates. In recent time, this has meant a study increase in credit card rates. Some Americans use a personal loan as a safe harbor because the interest rate is usually fixed; you know exactly what you will pay until the loan is paid off. With a credit card, the monthly payment can always change. Unlike the HELOC, personal loan rates are set with simple interest amortization schedules.
Personal Loans Have a Fixed Term
Credit cards are revolving, and you can always keep using them even as you pay each month. This means you may not ever fully pay off the balance. But with a personal loan, you have a fixed term to pay off the loan at a fixed rate. You know what you will pay and for how long. This provides borrowers with control over their finances and peace of mind.
You Can Refinance A Personal Loan
Another reason that personal loans are surging with inflation is that you can always refinance if interest rates drop. Suppose you have a $5,000 loan at 10% and next year rates fall. If you can get an 8% rate, it may make sense to refinance.
Personal Loans Don’t Have Collateral
Some borrowers want the lowest rate possible, which requires you to have collateral, such as with a home equity loan or home equity line of credit (HELOC). But not everyone wants to put their house on the line in uncertain economic times. That’s why a personal loan with a reasonable interest rate – if you have good credit – can be a reasonable compromise in inflationary times. You can avoid risking your home or other collateral and still get a relatively low interest rate.
Personal Loans Are Steady In Inflationary Periods
Taking out a personal loan when there are inflationary pressures can work in your favor because the loan and repayment schedule do not change regardless of market conditions. The interest rate and loan term stay the same. Also, the money you pay back in the future is worth less than before, so personal loans become less expensive because you pay back with money that has been devalued.
Getting a personal loan can be a good bet in inflationary periods, and if the data is any indication, many Americans are turning to personal loans to protect their finances during uncertain economic times. If you are not sure how much money you need, another similar option is a personal line of credit. This is also an unsecured loan and will allow you to borrow as you need it.
There are many excellent personal loan products on the market, especially for those with good credit. Talk to your loan adviser today to learn which personal loan product may help achieve your financial goals during inflationary times.
