Consumer Borrowing Rates Could Rise in 2022. Will Personal Loans Stop Making Sense?

Borrowers may need to brace for higher costs.

There are different types of loans you might seek to take out at some point in your life, and some may be more or less flexible than others. When you take out an auto loan, for example, you can only use your loan proceeds to purchase a car. Similarly, you can only use a mortgage to buy a home.

Personal loans work differently. The great thing about personal loans is they allow you to borrow money for any purpose. 

Need money to start a small business? A personal loan could serve as that capital. Want to update your home's furniture or make improvements? A personal loan could make that possible. Heck, you could even take out a personal loan and splurge on a Caribbean cruise if you so desire (though to be clear, borrowing money to take a vacation is a generally unwise idea). 

But as 2022 moves along, personal loans could get more expensive. And once that happens, they may not make sense for some borrowers.

Why personal loan rates could rise

The Federal Reserve has plans to raise its federal funds rate several times this year. That's the rate banks charge one another for short-term borrowing. 

Although the Federal Reserve does not set consumer interest rates, its actions tend to influence them. When rate hikes occur, consumer borrowing tends to get more expensive. That means mortgage rates tend to rise, credit card interest rates tend to rise, and personal loan rates tend to rise. It's all part of one big pattern. As such, personal loans may become increasingly less affordable as 2022 ticks away. 

Will a personal loan be a viable borrowing option for you this year?

Whether a personal loan ends up making financial sense for you this year will hinge on different factors, including the reason you want to borrow money and the other borrowing options you have. If you have a truly pressing need to borrow money -- say, to make home repairs that can't be put off -- then moving forward with a personal loan could make sense later this year, even if doing so means signing up to pay more interest. 

On the other hand, if you have borrowing options at your disposal aside from a personal loan, then it could pay to look at those. You may, for example, own a home with a lot of built-up equity in it. In that case, you might manage to snag a lower interest rate on a home equity loan than a personal loan.

You may also have someone in your life who's willing to lend you money. Say you have a sibling who's more than comfortable, and you have to make a $2,000 roof repair that can't be put off. Your sibling may be in a position to loan you that money interest-free, or at a very low rate, so that would be something to consider as well.

All told, it could still make sense to take out a personal loan later this year even if borrowing rates rise across the board. But it's also wise to explore alternative borrowing options before going that route.