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Is Taking Out a Personal Loan During High Inflation a Good Idea

By: Ryan Kelly August 10, 2022

If you’re in the market for some type of personal financing, you may be encountering sticker shock in 2022. In June, inflation topped 9% for the first time in over 40 years , and the Federal Reserve has been aggressively hiking the federal funds rate in order to combat this skyrocketing price jump. Personal loans haven’t been immune to rising rates, and in fact are up over 25% on average since early 2022 alone. While average rates hit an all-time low of 10.30% on Feb. 7, 2022, they spiked up to 12.98% in the first week of August. This type of environment might seem downright hostile if you’re looking to borrow money. However, it actually opens up a great opportunity if you want to take out a personal loan. Here’s the reason why you might want to look at personal loans right now, along with a few caveats you should be aware of.

How Inflation Affects Personal Loan Rates

High inflation doesn’t directly affect personal loan rates. However, the environment surrounding high inflation typically pushes rates higher. To contain higher-than-desired inflation, the Fed typically increases the federal funds rate in an attempt to rein in purchasing demand and slow down the economy. In response, banks usually raise the rates they charge for everything from personal loans to credit cards. So, while high inflation – and even high federal funds rates – aren’t specifically linked to personal loan rates, they all tend to rise in lockstep.

Advantages of Personal Loans During Inflationary Periods

No one wants to pay higher interest rates on their loans. But at certain times, taking out a personal loan can actually be advantageous to your overall credit portfolio. If you need the money, you can’t be as concerned about the interest rate you have to pay – you’ll just have to take the best available market rate at the time you need it. But there are ways to be smart about your personal borrowing.

 

For example, if you have an outstanding balance on a credit card, your interest rate may have jumped to nearly 18%, as average rates sat at 17.92% as of early August 2022 – the highest of all time.  With the Fed ready to raise rates further throughout 2022, that rate will likely surge well past 18% by the end of the year. But if you can move your balances to a fixed-rate personal loan with rates closer to 10%, you’ll save a significant amount of interest. Also, it won’t matter what the Fed does the rest of the year, as your rate will be locked-in. If you keep your balances on credit cards instead, you may end up with a rate of over 20% before all is said and done.

 

Another advantage offered by a fixed-rate personal loan is that you may have the opportunity to refinance your loan in the future if rates were to fall. There are two scenarios under which this may be possible. First, the Fed may overshoot in its fight against inflation, triggering a recession in the economy. In that case, the Fed would be forced to trim rates to stimulate growth once again. Second, if the Fed is able to successfully tame inflation without a recession, it is still likely to at least trim rates from restrictive to neutral, if not accommodative. Either way, this would translate to lower rates for personal loans, which could afford you the opportunity to refinance.

Personal Loan Caveats

Personal loans come with a significant number of advantages. In addition to being fixed loans that traditionally have lower rates than credit cards, most personal loans have no additional fees attached to them and can be funded rapidly via an online application. However, there are a few drawbacks to note.

 

First, while the interest rates on personal loans may be lower than some other options, they aren’t traditionally “low.” You may be able to find better rates via a secured or collateralized loan. They also aren’t good options for funding things like home or auto purchases, as those rates are currently in the mid-single digits, or even lower. Some lenders do tack on fees for prepayment or even originating a personal loan, so you’ll want to watch out for this as well.

Best Way To Pick a Personal Loan

Just as with any financial product, not all personal loans are created equal. Lenders can offer a wide range of terms, interest rates, and fee schedules, and the quality of their customer service can vary considerably. In other words, you should shop around to find the best combination of factors for your needs. Enlisting the help of a loan specialist allows you to compare a number of different lenders at once, with the information all available for you right from your computer screen. Additional help is available by discussing your needs directly with a loan expert, who can provide unbiased opinions on your options free of charge. Even if you decide to go it alone in your quest for the best personal loan option, do yourself the favor of looking at a number of different lenders so you can get the best match for your needs.

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