Will Personal Loan Rates Get More Expensive After This Week's Fed Meeting?

In both February and March this year, the Federal Reserve raised interest rates by 0.25% as part of its efforts to slow the pace of inflation. Those rate hikes, on top of the seven rate hikes the Fed implemented in 2022, have driven the cost of consumer borrowing up.

Meanwhile, the Fed's next meeting is set for May 2 and 3, and there's a good chance that a third rate hike in 2023 will come as a result of that gathering. But that's not the best news for consumers looking to take out personal loans.

Prepare for your personal loan to cost more

There are different factors that dictate what interest rate you'll pay on a personal loan. One of those factors is your credit score.

Personal loans are unsecured, so they're not tied to a specific asset (whereas mortgage loans, for example, are secured by the homes they're used to finance). Because of this, lenders take on a pretty big risk, since there's no single asset to sell or repossess to be made whole in the event that a borrower defaults on their payments. That's why personal loan borrowers with higher credit scores tend to get the lowest interest rates -- they present as less risky candidates in the eyes of lenders.

But market conditions also play a role in determining personal loan rates. And right now, the cost of borrowing is up across the board due to the aforementioned Fed rate hikes. If the Fed raises interest rates yet again in May, you can expect to pay up even more when you take out not just a personal loan, but really any sort of loan.

Should you hold off on a personal loan?

If you have a truly pressing need to borrow money, then you may have to move forward with a personal loan in the near term, even if that ends up being a more expensive prospect than you'd like. But if you're borrowing for a purpose that can wait, then waiting might be best. If you hold off and wait for borrowing rates to come down, your personal loan might cost you less.

So let's say your home needs repairs you've been putting off, and not having that work done is impacting your quality of life. That's a good reason to apply for a personal loan now, even with borrowing rates being less favorable. But if you have a perfectly nice, functional kitchen and simply wish to renovate it to make it more modern and gain a little countertop space, well, that's the sort of project you may want to put on hold for the time being.

We don't know for sure that the Fed is going to choose to raise interest rates at its next meeting, but that scenario is very likely. Inflation has cooled since mid-2022, but it isn't where the Fed wants it to be. And until the rate of inflation drops even more, we're likely to see the Fed do what it feels it needs to do to bring the general cost of living down.