The Fed Just Raised Interest Rate Hikes. How Will That Impact Personal Loans?

The Federal Reserve has been working to cool inflation since early 2022. In March of last year, it began to raise its benchmark interest rate and continued to do so in the course of 10 consecutive meetings.

Last month, however, in response to cooling inflation, the Fed hit pause on its interest rate hikes. And that no doubt allowed consumers to breathe a sigh of relief.

But on July 26, the Fed announced that it would be raising interest rates once again by 0.25%. And that's not the best news for those needing to borrow money in pretty much any shape or form.

Bad news for personal loan borrowers

Personal loans are often hailed as a relatively affordable way to borrow money, and consumers tend to like them because they're flexible in that they can be used for any purpose. Want to renovate your home? You can take out a personal loan to finance your next project. Need to repair your car? A personal loan can help there, too.

But in light of the Fed's most recent interest rate hike, consumers looking to sign a personal loan in the near term may be unpleasantly surprised at how expensive it is. Borrowing costs are already up across the board. But the Fed's latest rate hike will only pile onto that, making a new personal loan more expensive.

Current borrowers should not be affected

While the Fed's latest rate hike could make it more expensive to put a new personal loan into place, it shouldn't have an impact on existing loans. The nice thing about signing a personal loan is that you lock in a fixed interest rate with predictable monthly payments. So changes in market conditions won't change the amount of money you have to send your lender each month.

How to snag the most affordable personal loan possible

Personal loans became expensive to sign even before this latest interest rate hike. So at this point, if you're looking to borrow, you should do what you can to keep your costs to a minimum. And one good way to lock in a lower interest rate on a personal loan is to come in with a great credit score.

Because personal loans are unsecured and aren't backed by a specific asset, lenders take on a lot of risk in the course of giving them out. So having a higher credit score sends the message that you're a less risky borrower who can be trusted.

If your credit score isn't so great, you may want to hold off on getting a new personal loan until it's in better shape. But if you can't wait, a good way to raise your credit score quickly is to correct errors on your credit report that may be painting you in a less favorable light. Pull up a copy of your credit report from each of the three major bureaus -- Experian, Equifax, and TransUnion -- and address any inaccuracies you see.

You can also boost your credit by paying all incoming bills on time. But to be clear, that's a process. So if you need to borrow money now, your credit score may not improve by the time you put in your loan application.

All told, the Fed's latest move isn't a great one for consumers looking to take out personal loans. But if you have one of these loans in place already, rest assured that there shouldn't be an impact on your current monthly payments.