With the Federal Reserve raising interest rates at a rapid pace in 2022 and 2023, the cost of consumer credit has risen significantly. And this is certainly true when it comes to personal loans. According to the Fed's own data, the average interest rate on a 24-month personal loan increased from 9.38% in 2021 to 11.87% in 2023, a difference of nearly 2.5%.
However, with many experts predicting that the Fed is going to start cutting interest rates sooner rather than later, is there relief in sight for would-be personal loan borrowers? Or will rates stay elevated for the foreseeable future?
The Federal Reserve and personal loan interest rates
To be perfectly clear, there isn't a direct relationship between the benchmark interest rates set by the Federal Reserve (specifically, the federal funds rate) and personal loan interest rates. Lenders can set their own rates, and each lender has different underwriting processes. It's not uncommon for the same person to apply to several different personal loan companies and get interest rate offers more than 5 percentage points different from one another.
Having said that, personal loan interest rates and other consumer interest rates tend to move in the same direction as the Fed's benchmarks. We already discussed personal loan interest rates, but as another example, the average interest rate on a 72-month new auto loan increased from 4.82% in 2021 to 7.89% last year. It is no secret that mortgage rates have risen significantly as well. During the same period, the benchmark federal funds rate went from virtually zero to a target range of 5.25%-5.50%, where it currently sits.
The latest projections
Four times per year, the Federal Reserve board members release their projections for future interest rate movements. These are certainly not binding, but they can give us a good sense of where the people who set monetary policy see things heading in the future.
According to the most recent Federal Reserve projections (made in December 2023), the median expectation is for three quarter-percentage-point cuts to the federal funds rate in 2024.
Investors seem to be expecting the same. According to the CME FedWatch tool, the median expectation is for the Fed to make its first rate cut of the year in June, and for a total of three rate cuts throughout the year, for a total reduction of 0.75%. And while nobody has a crystal ball, derivatives markets are pricing in no chance that rates will be higher at the end of 2024 and just a 0.6% chance that the Fed won't cut rates at all.
Will personal loan interest rates fall in 2024 and beyond?
To sum it up, unless something dramatic happens, such as an unexpected inflation spike, there's a high probability that the Federal Reserve will start to cut interest rates later this year. And if that happens, it would be surprising if personal loan interest rates didn't follow. However, keep in mind that there's no guarantee that the Fed will actually lower interest rates, and even if it does, remember that there isn't a direct relationship with personal loan interest rates, so there's no guarantee rates will turn lower.
How can you save on a loan regardless?
No matter what happens with personal loan interest rates as a whole, there are steps you can take to make sure that you get the best possible rate you can. For one thing, if your credit score isn't exactly top-notch, take steps to boost your score. These include paying down existing debt, and disputing errors on your credit report. You can have a significant impact quicker than you might think.
And it's an absolute must to shop around. Most personal lenders will allow you to check your personal rate offers without a hard credit pull, and with a quick and easy pre-approval form. Even if rates don't fall this year or next, you still have the power to improve your chances of saving money on a personal loan.
FAQs
Personal loan annual percentage rates dropped to their lowest point in nearly two years in the second quarter of 2024, but like other types of credit, average rates are still higher than they were in 2020 and 2021.
Are personal loan rates expected to go down? ›
Average personal loan rates started at 10.37 percent in January 2023. Rates continue to climb in 2024, currently standing at 12.38 percent as of July 2024. Personal loan rates may drop if the Fed starts cutting rates in the second half of 2024.
What are the predictions for interest rates in 2024? ›
The Mortgage Bankers Association didn't include mortgage rate predictions in its August 2024 Economic Forecast, but its latest forecast in May 2024 showed rates falling from 6.4% in January to 5.9% in December.
Is 7% a good rate for a personal loan? ›
A good personal loan interest rate depends on your credit score: 740 and above: Below 8% (look for loans for excellent credit) 670 to 739: Around 14% (look for loans for good credit) 580 to 669: Around 18% (look for loans for fair credit)
What is the average personal loan interest rate right now? ›
Average Overall Personal Loan Rates
| This week's rates | Last week's rates |
|---|
| Average overall rate | 21.18% | 21.18% |
| Average low rate | 11.65% | 11.65% |
| Average high rate | 30.71% | 30.71% |
| Highest rate | 99.99% | 99.99% |
1 more rowA good interest rate on a personal loan is anything lower than the market's average rate. But a good rate for you depends on your credit score. For example, if you have excellent credit, a rate below 11 percent would be considered good, while 12.5 percent would be less competitive.
Are loan rates expected to drop? ›
Most major forecasts expect mortgage rates to go down throughout 2025 as the Fed continues to lower its benchmark rate. But because mortgage rates are influenced by the economy, this forecast could change depending on how the economy evolves in 2025.
Why are personal loan interest rates so high? ›
Borrowers with low income or a history of missed payments tend to get the highest interest rates because there is no certainty that they will be able to make full payments. The length of the loan: Lenders make more money from long-term loans than short-term ones because the debt has more time to accrue interest.
Will interest rates ever be 3 again? ›
Will mortgage rates ever be 3% again? A few years ago, homebuyers could take out home loans with rates between 2% and 3%. Mortgage rates will fall over the next year, but they won't reach those levels. Housing market experts say it would take a significant economic crisis for mortgage rates to drop below 3%.
Where will interest rates be in 2026? ›
For the end of 2026, the median dot now shows a target range of 3% to 3.25%, versus 2.75% to 3% three months ago. And officials' median longer-run estimate was for a target range of 2.5% to 2.75%, also a quarter of a percentage point higher than in December.
"The Fed will continue to cut the short-term Federal funds rate in 2025, but we are in a new era where a 6% rate on a 30-year fixed rate mortgage is going to be the norm."
What is a high interest rate for 2024? ›
The revised FD rates are effective from September 1, 2024. After the revision, the bank will offer FD interest rates between 3% and 7.25% for tenures between 7 days to 10 years for deposits of less than Rs 3 crore for general citizens. For senior citizens, the bank offers an interest rate between 3% to 7.75%.
What is the interest rate for the T-bill in 2024? ›
1-Year T-Bill Singapore (25 Jul 2024 Auction): BY24102W
3.38% p.a. (Check with your bank for the exact closing date.)
How much interest can a private lender charge? ›
They may also be limited in the number of loans they can make. Interest rates on private money loans tend to be higher than loans from licensed lenders. From 15% to 20% is typical. However, in the case of a loan from a friend or relative, they may also be lower than market rates.
Will student loan interest rates go up in 2024? ›
Undergraduate loans now carry a rate of 6.53% for the 2024-2025 school year, up from 5.50% last school year. Graduate direct loans have a rate of 8.08%, up from 7.05%. And PLUS loans for grad students and parents of undergraduates rose to 9.08%, up from 8.05% this year.
Why are interest rates so high for personal loans? ›
Borrowers with low income or a history of missed payments tend to get the highest interest rates because there is no certainty that they will be able to make full payments. The length of the loan: Lenders make more money from long-term loans than short-term ones because the debt has more time to accrue interest.
Will interest go down in 2026? ›
But economists at the World Bank expect that inflation will moderate over the next two years and by the end of 2026 interest rates will come down along with it, which experts say will buoy the housing market.
What is considered a high interest rate on a loan? ›
What is a high-interest loan? A high-interest loan has an annual percentage rate above 36%, the highest APR that most consumer advocates consider affordable. High-interest loans are offered by online and storefront lenders that promise fast funding and easy applications, sometimes without checking your credit.
