Personal loans let you borrow money for any purpose. And for that reason, they tend to be a popular borrowing choice among consumers. As of the first quarter of the year, U.S. personal loan debt reached $225 billion, up from $178 billion a year prior, according to TransUnion.
You may be eager to sign a personal loan to address a number of different needs, whether it's fixing up your car, renovating your home, or paying for courses that give you the skills you need to further your career. But now's really not a great time to sign a personal loan. If you're able to wait until 2024, you may find that it's less expensive to take one out.
Avoiding debt right now is a smart move
It's generally a good idea to keep your debt load as low as possible. But right now is an especially bad time to be signing any sort of loan, whether it's a personal loan, auto loan, or home equity loan.
The reason? Since March 2022, the Federal Reserve has raised interest rates 11 times in an effort to cool inflation. The Fed doesn't set personal loan rates, or any consumer borrowing rates, for that matter. Those rates are determined by lenders on an individual basis.
Rather, the Fed oversees the federal funds rate, which is what banks charge each other for short-term borrowing. When that benchmark interest rate rises, lenders tend to follow suit. So right now, even if your credit is great, you might end up with a higher interest rate on a personal loan than you want to get stuck with. And that could leave you with expensive monthly payments.
You might get a better deal in 2024
While interest rates are up right now, things could start to change in 2024 if the Fed decides to cut rates. So next year might be a better time to put a personal loan in place.
Let's say you're looking to borrow $10,000 and pay it back over a five-year period. If you get stuck with an interest rate of 9% now, your monthly payments will be $208 and you'll end up spending $2,455 on interest over the life of your loan.
But if you're able to snag a 7% interest rate on that same loan next year with the same repayment period, you'll be looking at monthly payments of $198 instead. And you'll only end up spending $1,881 on interest.
If you're not borrowing a particularly large amount, you may decide to just move forward with a personal loan now so you don't have to put off paying for whatever it is that money is supposed to finance. In this example, the difference between a 7% interest rate on a personal loan versus 9% is $10 a month.
Granted, the difference in total interest is more significant. But on a monthly basis, the $10 may not make such a big dent in your finances.
The point, however, is to recognize that borrowing conditions generally just aren't optimal right now. So if you are able to wait on signing a personal loan for, say, another six months or so, you might benefit from that financially.
