November 24, 2022
  • November 24, 2022

Will personal loans be more expensive in 2023?

By on September 24, 2022 0

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There is reason to believe they could.

Key points

  • Personal loans allow you to borrow money for any purpose.
  • Despite this flexibility, 2023 may not be the best time to remove it.
  • Overall, loans could become more expensive in 2023 to contain rising inflation.

If you need money, be it to pay for home repairs, renovations, or medical bills, you may be willing to apply for a personal loan. The great thing about personal loans is that you are not limited to financing a specific asset – while with a mortgage, for example, you can only use the proceeds of the loan to finance the purchase of a home.

Personal loans also offer the benefit of relatively affordable interest rates. And this is important because the lower the loan interest rate, the less money you spend when you borrow.

But while the appeal of personal loans is easy to see, they may not be the best borrowing option next year. This is because interest rates on personal loans can go up, making these loans less affordable than usual.

Discover: These personal loans are the best for debt consolidation

More: Pre-qualification for a personal loan without affecting your creditworthiness

Why the interest rate on personal loans may increase

There are various factors that determine the interest rate on a personal loan. One of the factors is your creditworthiness, and it is very important.

Since personal loans are unsecured – meaning they are not tied to a specific asset – lenders rely on your creditworthiness as a borrower to make that money. The higher your credit score, the lower the risk the lender says it is taking. Lenders tend to reward lower-risk borrowers with lower interest rates.

But another factor that affects interest rates on personal loans is general market conditions. And there are reasons to believe that loans will be more expensive next year.

The Federal Reserve is aggressively raising interest rates in an attempt to cool inflation and give consumers much-needed relief. When rates go up, people tend to borrow less money, and this can lead to lower spending. And while this may seem like a bad thing, we actually need a bit of a slowdown in spending so that supply chains can catch up with demand and prices can drop.

But while higher loan rates can help slow down the pace of inflation, they can make life difficult for consumers – namely, leading to higher monthly loan payments. So this is a good reason to potentially avoid a personal loan for the next year. Signing one can mean paying a lot more interest than usual.

Other borrowing options to look out for

While personal loans can be quite affordable, you can pay more next year. So if you own a home, it pays to compare the interest rate on your personal loans with the rate on your home loans and see which option allows you to borrow the most competitively.

Many people have large stakes in their homes as property values ​​grow nationally. So if you’re on that boat, it pays to check to see if a home equity loan will lead to lower monthly payments than a personal loan.

On the other hand, if you don’t own a home, a personal loan can really become your cheapest bet in 2023 – even if you get stuck at higher interest rates through no fault of your own.

The Ascent’s best personal loans for 2022

Our team of independent experts has studied the fine print to find selected personal loans that offer competitive rates and low fees. Start by looking at The Ascent’s best personal loans for 2022.