Personal Loans

Inflation Is Rising: Could Now Be the Time to Get a Personal Loan?

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According to data from CompareCards, a LendingTree company, the average credit card balance today is $6,354. With credit card interest rates frequently reaching 20% or higher, your card balance can balloon out of control.

If you’re battling a high credit card balance, you’ve likely thought about consolidating your debt with a personal loan. If you’ve been putting it off, now may be the time to pull the trigger since interest rates may start to rise.

As the inflation rate rises, the federal government could intercede, raising interest rates to slow the economy. All forms of loans, including personal loans, could be affected.

Personal loan rates are rising, but they’re still historically low

Personal loans are a form of debt you take out to pay for personal expenses. You can use them to consolidate your debt or to finance a large purchase. They can be a smart option because they have lower interest rates than credit cards with fixed interest rates and repayment terms.

Over the past five years, interest rates on personal loans have been slowly increasing. In 2014, the average interest rate on a two-year personal loan was 10.22%. As of November 2018 — the latest available data — that number increased to 10.70%. But their interest rates are still far lower than they have been historically. For example, the average interest rate on a two-year personal loan in 2002 was 12.54%.

Personal loan interest rates have been minimally affected due to a low rate of inflation. According to the Consumer Price Index, the all-items index increased 1.6% over the past 12 months. But as the inflation rate rises, so will the interest rates on personal loans.

Why rates are expected to continue to rise

According to Kiplinger, the inflation rate is expected to increase in 2019. In 2018, we had low gasoline prices, which helped keep the inflation rate relatively low. But increased fuel costs, tariffs and higher worker wages will cause prices to increase across the board.

If the inflation rate rises, the federal government could intercede. Since 2015, the Federal Reserve has increased its benchmark interest rate nine times, tightening access to cheap credit. If the inflation rate continues to rise, it could do the same thing again.

Why a personal loan might be a good bet in a rising rate environment

If interest rates do go up, credit cards will likely see a significant increase in average interest rates. The average interest rate on all credit accounts assessed interest as of November 2018 — the latest available data — is 16.86%. With such a high interest rate, your credit card balance could grow quickly, thanks to interest charges.

Taking advantage of low interest rates on personal loans could help you save a significant amount of money. And, because personal loans tend to have fixed interest rates rather than variable ones, it’s a great way to lock in a low rate now to tackle your debt.

You could use it to consolidate higher-interest credit card debt. Since credit card rates are likely to rise even higher, this could be an especially good way to lock in a low rate on a personal loan and use it to pay off credit card debt.

For example, let’s say you had the average amount of credit card debt — $6,354 — with an APR of 16.86% and a minimum payment of $100. It would take you more than 13 years to pay off your credit card. Worse, you’d repay a total of $16,000. That high interest rate would cost you over $9,640 in interest charges.

But let’s say you consolidated your debt with a personal loan and qualified for a three-year loan at just 6% interest. Your payment would increase to $193 a month, but you’d be out of debt more than 10 years earlier. Even better, you’d repay a total of just $6,959. By taking a few minutes to apply for a personal loan, you’d save more than $9,000.

Another way to consolidate your debt

With rising interest rates, you might want to explore other ways to consolidate your debt. Because personal loans tend to be unsecured forms of debt — meaning you don’t need to put down a valuable as collateral — they usually have higher interest rates than secured types of debt.

Another type of debt consolidation to consider is taking out a home equity loan. With a home equity loan, you borrow against the equity in your home. Interest rates on home equity loans tend to be much lower, and you can spread out payments for as long as 15 years, giving you more breathing room in your budget.

But a home equity loan is a secured form of debt, so your home serves as collateral. If you fall behind on your payments, the bank could put your home into foreclosure.

The bottom line

As inflation begins to go up, so will interest rates to stem the tide. Personal loans, credit cards and other forms of debt will see their interest rates increase. If you have high-interest debt, now is the time to take advantage of low interest rates to consolidate your debt and save money.

If you decide that a personal loan is right for you, learn how to get the lowest rates available for you.


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