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The Federal Reserve Fund’s benchmark rate affects the fees of consumer loans, including personal loans, as it affects the cost of lending money. After three interest rate cuts in 2024, the Federal Open Market Committee left its target rate to 4.25-4.5% in June 2025.
“For consumers, the message is clear: high interest rates go anywhere. The US economy appears to be in an uncertain position,” wrote Sarah Foster, reporter for Bankrate’s US economy and the Federal Reserve.
How does the Fed affect personal loans?
Federal fund interest rates affect the interest rates that lenders provide to new borrowers as they affect the costs of lenders. If the rate is high, lending will be more expensive. The average personal loan rate has also risen as the Fed introduced rate hiking between 2022 and 2023.
Even after three consecutive cuts in 2024, the industry average remains close to historic highs. The FOMC’s June decision to leave the target rate unchanged is unlikely to move that needle much.
How the Fed will affect existing loans
The majority of personal loans are fixed-rate loans, and interest rates remain unchanged until they are paid off from the time they arise. Borrowers with fixed-rate personal loans will not see changes in interest rates or monthly payments when the Fed raises or lowers interest rates.
This means that locking onto a low-interest fixed-rate personal loan will not change based on federal rates.
Will personal loan interest rates begin to fall?
The simple answer is that they should – but that takes time and borrowers with good credits will first benefit from the good ones. Some consumer loan fees have already been checked downwards ahead of cuts, including mortgage fees.
However, McBride said: “Individual loan rates are not particularly sensitive to interest rates in previous interest rate reductions or interest rate hike cycles, and there are borrowers’ fees that travel in a much smaller range than the Fed’s movement.”
Bankrate senior economic analyst and Washington Director Mark Hamrick said it is likely that the September interest rate cuts will be the first for the “stable drumbeat” from late 2024 to early 2025 to early 2025.
“In response to historically high inflation, the extended rate has been so high that it takes time to unleash a lot of it,” says Hamrick. “As a result, it will take some time before borrowing rates fall into meaning.”
McBride suspects it will have a major impact on the interest rates borrowers receive.
“The reality for many personal loan borrowers is that they are being taken because there is an urgent urgency,” he points out. “Take down lower fees may not be an option, and the savings from doing so is not a game changer. On a $5,000, three-year loan, the 1% point difference is less than $3 a month, with total semester interest rates under $100.”
How can you get an affordable loan despite high interest rates?
While personal loan interest rates are currently high, federal interest rates are not the only factor that affects the cost of a loan. You can take several steps to get the best deal possible, such as improving your credit score or applying with a co-borrower.
“This is where shopping really pays off among the various lenders,” adds McBride.
Here are some steps you can take to get the best possible deal on your personal loan:
Conclusion
Personal loans are fixed profit products, so current borrowers are not affected by changes in the Fed rate. While interest rates on new loans are unlikely to plummet soon, new borrowers can qualify for competitive interest rates by improving their credit and shopping for the best deals. If the fees get calm, borrowers with great, great credit who took out their loans when the fees were at their peak should consider refinancing their personal loans.
