Lower personal loan rates could be on the horizon in 2024 after the Fed made progress in curbing inflation in late 2023. That progress came after four more rate hikes from the Federal Reserve in 2023. Bankrate Chief Financial Analyst Greg McBride, CFA suggests that rate cuts may be possible in 2024, which could benefit personal loan rates if the economy does not enter a recession .
McBride explains the relationship between personal loan rates, the US economy and a possible decline in the Federal Funds rate, which stands at 5.25-5.5 as of the May 1, 2024 meeting.
I predict two rate cuts to happen in the second half of next year, and in response we could see a small decline in personal loan rates.
– Greg McBride, CFA | Chief Financial Analyst at Bankrate
With inflation showing signs of slowing, borrowers may be able to expect lower personal loan rates in 2024. Any cuts by the Fed will likely have a direct effect on personal loan rates. “Personal loans are tied to short-term interest rates, such as the prime rate that moves with Fed rate cuts,” McBride explains.
- The average interest rate on personal loans started at 10.37 percent in January 2023.
- Interest rates continued to rise throughout the year, reaching a peak of 11.60 percent at the end of December.
- Interest rates on personal loans could fall if the Fed starts cutting rates in the second half of 2024.
What happened to personal loan rates in 2023?
The increase in personal loan rates was steadier in 2023, following four Fed rate hikes during the year. Although the Fed halted its rate hike campaign in July, interest rates on personal loans continued to rise at the end of the year.
Despite higher interest rates, total unsecured personal loans set a new record and grew to $241 billion according to TransUnion data in the third quarter of 2023. Consumers are also borrowing more, with the average personal loan balance rising to $11,281 per consumer, marking another record milestone.
While the number of new personal loans has declined, they are still higher than pre-pandemic times – a sign that consumer demand for personal loans has not waned in the face of continued interest rate increases.
The direction of 2024 lending standards will depend on the economy
Overall, personal loan requirements have become stricter since the fourth quarter of 2023. Whether personal lending standards will be tightened further depends on how the economy fares in 2024. “If the economy enters a recession in 2024, those tight credit conditions will continue and they will become even tighter,” says McBride.
Recent data from TransUnion showed a 15 percent decline in total personal loans originated in the third quarter of 2023 compared to 2023, suggesting lenders may be targeting less risky borrowers. On the other hand, personal loans for excellent credit increased 20 percent from 2023, meaning lenders may prefer loans to borrowers with excellent financing.
McBride suggests that a healthy economy can also have a positive impact on getting approved for a personal loan, even if interest rates fall. “If the economy averts a recession, that will really help from an availability of credit perspective on personal loans.”
However, if a weaker economy is the reason for the Fed’s rate cuts, personal loan rates may not fall, and loan approvals could become much more difficult. “If the Fed cuts rates because the economy is turning, you’re not necessarily going to see that translate into lower interest rates because credit is going to tighten,” McBride added.
Next steps for consumers
The best plan is to reduce as much expensive debt as possible. McBride recommends that consumers pay down expensive debts, such as credit cards or high-interest personal loans, as interest rates may remain high into 2024.
Despite the encouraging prospect of the Fed cutting rates after eleven consecutive rate hikes, interest rates are likely to remain high. Consumers should not expect a rapid drop in rates anytime soon.
Interest rates skyrocketed. They’re going to take the stairs down.
– Greg McBride, CFA | Chief Financial Analyst at Bankrate
Consider increasing your emergency savings to avoid high debt in the future. Having extra savings provides a cushion when unexpected expenses arise and reduces the chance of having to borrow to make ends meet.
Taking out a new personal loan could be a way to improve your financial situation in 2024, especially if you paid off multiple credit card debts in 2023 with a debt consolidation loan. “You may be able to refinance a personal loan that was taken out at a much higher rate at a more competitive rate now that your credit has improved,” says McBride.
