Should I take out a personal loan when interest rates are rising?

The Federal Reserve’s indication to raise interest rates again in 2023 has several implications, especially if you’re thinking about taking out a personal loan.

Borrowers interested in taking out a loan right now or who have a loan with an adjustable interest rate are seeing interest rise with each Fed increase. This may be a reason to rethink borrowing money at this time or in the near future.

Moreover, concerns around the uncertain financial landscape of 2023, including fear of layoffs, a potential housing market crash and looming threats of a recession, may make you hesitant to take on debt.

However, despite rising rates and financial uncertainty, taking out a personal loan can still be the right decision for you based on your situation. Taking out a personal loan may help you by consolidating your debt payments, funding home repairs or letting you invest in personal education.

With the right circumstances, diligence in finding the right loan terms and the right lender, taking out a personal loan is possible, even before loan rates drop.

When a personal loan may be a good idea

When taking out a personal loan, think about the loan type and terms that will work best for you, as well as the alternatives that may be available.

There are different types of personal loans to consider, with different ways of calculating interest, payment terms and qualification methods.

• Fixed-rate loans use an interest rate that is established when the loan is signed, and that does not change unless the loan is refinanced. Each monthly payment remains the same, and the rate doesn’t change with the market once it’s been locked.
• Variable-rate loans, on the other hand, have rates that fluctuate with the market, meaning that your monthly payment can go up or down depending on the federal rate or other economic factors. Certain types of mortgages and car loans can have a variable rate, though personal loans are generally fixed rate.
• Secured loans are loans taken out against collateral, such as your vehicle or a piece of land. While this can help borrowers with low credit secure a loan, if you default, the loan provider can repossess the collateral.
• Unsecured loans don’t require collateral and are generally offered to those with good or excellent credit. Moreover, they may come with higher interest rates.
• Debt consolidation loans allow a borrower to pay off other debts while taking on a singular loan, which simplifies payments and can offer a better interest rate.
• Personal lines of credit allow for a continuous borrowing period, where the borrower draws from a pool of funds over a set length of time and then has to pay back however much they borrowed.

There are several reasons why you may take out a personal loan. If you’ve drained your savings account and face an emergency, a personal loan can help you manage medical, funeral or automotive debt while you get back on your feet.

If you have multiple loans, a debt consolidation personal loan can help compress multiple monthly payments into one, making it easier to track your finances and possibly offering you a better interest rate than your original loans.

Additionally, if you have a home improvement project, a car restoration project or other personal investment, a personal loan can get you the cash upfront.

While several loan options exist, depending on your circumstances, a personal loan may save you more money than other loan types.

Taking on credit card debt, for example, can hit you with higher interest rates than a personal loan and damage your credit score if your utilization rate increases. Home equity loans require that you own real estate and come with appraisal requirements, which can take time and money. Withdrawing from investment funds such as your 401(k) or IRA to get the money you need can result in fees and penalties.

With a personal loan, you can quickly access cash with a competitive interest rate and without the need for extra steps. For example, First Tech Credit Union offers an easy way to check rates online for their personal loans. First Tech also provides options for debt consolidation and personal lines of credit, making getting approved a faster and simpler process than equity loans.

Tips for keeping personal loans affordable

While the rising Fed rates may make taking out a personal loan seem pricey, there are ways to secure a rate and payment plan that fits your financial situation with the following methods.

Determine how much to borrow and your repayment term

The more you borrow, the more interest you’ll accumulate. When the rate is high, compounding interest can quickly add up.

When you take out a personal loan, think about how much you actually need and how much the interest will accumulate over the length of the loan. Make sure your income can handle the monthly payments and that you have a backup plan if you lose your job or have a lapse in income.

One way to borrow exactly as much as you need is to take out a personal line of credit, which allows you to borrow in increments over a period of time.

Compare lenders

When selecting a loan, shopping around can help you find the best rate and terms available. Get quotes from lenders and be sure to check the terms and conditions to avoid getting hit with hidden fees.

Prequalifying with a lender can give you insight into the rate you’d be offered with your credit score and history, as well as the chance to compare lenders.

It’s important to check if the prequalification will result in a soft or hard credit pull. A hard credit check can impact your credit score, while a soft credit check will not. First Tech Credit Union, for example, uses a soft credit check when prequalifying potential borrowers.

Clean up your credit

Good credit is key to not only qualify for a loan, but also secure a competitive rate. The average credit score for a qualified applicant for a personal loan is 741 as of 2022. If your score is below this, it’s recommended to take steps to boost it.

Before taking out a loan, check your credit history to make sure it’s accurate and that any old balances paid off have been cleared from your history – though keep in mind that it can take up to 30 days for a credit bureau to respond to any errors you report. If possible, try to lower your credit utilization rate if you have a high balance on your credit card and make sure all of your payments are on time.

If your credit score is on the lower end, you may not qualify for a loan. If you do qualify for a personal loan with bad credit, you might not get an ideal rate, meaning you’ll pay more in the long run.

Utilize a co-signer

If your credit score is not ideal, you might want to consider getting a personal loan with a co-signer who has good credit. A co-signer agrees to take on equal responsibility for paying the loan, putting them fiscally on the hook for your debt. If you fail to make payments, they will be obligated to make the payment or pay off the loan in full in your stead.

This can help you get a lower rate, as the lender will consider the co-signer’s credit history and income when calculating the interest rate. However, it’s important to choose someone who you trust and is comfortable with taking on the loan payments if you can’t.

Research credit unions

While your first thought when researching loan providers may be to turn to a bank or a lending company, a credit union might be able to offer you a better deal.

Credit unions can often offer more flexible terms of repayment, as well as a more personalized experience and more competitive rates.

For example, First Tech Credit Union offers loan terms of up to 84 months for unsecured personal loans and 144 months for stock secured loans, allowing you to make lower monthly payments than lenders with shorter terms.

Credit unions can also help you qualify for a loan even if your credit score is on the lower end and offer education and methods for boosting your score for the future. First Tech, provides expert advice and resources for learning how to improve your credit report.

Consider a personal loan with First Tech

First Tech Credit Union offers competitive rates for personal loans to its members, with options for secure and unsecured loans, flexible repayment plans and services geared toward tech and tech-adjacent professionals.

First Tech’s personal loans include a variety of features, including:

• Loan amounts from $500 to $50,000.
• Flexible loan terms from 24 to 84 months (two to seven years).
• No application fees, origination fees or prepayment penalties.
• Optional loan deferment for up to 45 days (terms apply).
• Payment protection against death, disability or unemployment.

First Tech’s panel of experts and educational resources can help you research what terms fit your financial situation the most, as well as navigate the qualification and repayment process.

First Tech offers a unique suite of loan products and options, including:

• Unsecured personal loan terms as long as 84 months.
• Revolving lines of credit with flexible repayment terms.
• Stock and certificate secured loans that let you keep collecting dividends on your collateral.
• Savings secured loans that let borrowers build their credit profile with their cash in the bank.

With these loan options in mind, First Tech members can find the loan terms that work best for them while avoiding taking on a credit card balance or cashing in on their home equity.

First Tech personal loans can be used for debt consolidation, home renovation projects, funding new business ideas, paying for a wedding or vacation or to help bolster an emergency fund during a crisis.

If you’re looking for a personal loan with flexible terms, personalized help, multiple options for borrowing and competitive market rates for members, consider checking out First Tech Credit Union.

The bottom line

As the year goes on, the Fed will likely continue to raise interest rates, which means taking out a personal loan now can help you avoid an even higher APR in the future.

From using a co-signer to cleaning up your credit, there are multiple ways to find an optimal personal loan rate., Be sure to do your research, consider the pros and cons of personal loans and take the steps to make your debt manageable from the beginning.

With flexible loans at competitive rates, First Tech Credit Union can offer the right loan to help consolidate your debt, pay for an emergency or fund a big-ticket investment. See if First Tech fits your financial lifestyle and borrow without worrying.