Personal loan rates have been hovering at historical lows for a couple of years now, and this could continue into the first part of 2015. But borrowers with bad credit scores are still finding it hard to qualify for loans, and they tend to pay higher interest rates as well.
Since 2008, the Federal Reserve has held the federal funds rate (which banks use when lending money to one another) just above zero percent. This is well below historical levels. They’ve done this to increase lending and stimulate the economy out of recession. And they are still doing it today, as we approach the new year.
This means we could continue to see historically low personal loan interest rates in 2015 — or at least through the first part of the year. Some members have voiced opposition and concern over the Fed’s efforts to keep rates low. As a result, we could see policy changes sometime next year. But it probably won’t happen for at least a few more months.
Will the Fed Raise the Federal Funds Rate in 2015?
The Fed’s policies and actions indirectly affect the cost of auto and personal loans, mortgages, and other types of consumer financing. Here’s how. When the aforementioned funds rate is held low, banks have more money they can readily lend and consumers can borrow at lower interest costs.
This is what we’ve seen over the last few years — the Fed’s monetary policies have resulted in record low personal loan rates for quite some time now. The question is, how long will the party last?
At the end of October, Federal Reserve officials said they would keep the funds rate between 0% and 0.25% for now. That’s where it has been for the last few years, ever since they launched their stimulus program in 2008. This means consumers could continue to enjoy low borrowing costs going into 2015. But it begs the question: How long will they hold it at that range, and what will happen with personal loan rates when the Fed does finally change its monetary policy?
According to the minutes from the latest Federal Open Market Committee (FOMC) meeting, which took place October 28 – 29, the committee plans to hold its current course until the economy gains more jobs. To quote the minutes: “In determining how long to maintain this target range, the Committee will assess progress … toward its objectives of maximum employment and 2 percent inflation.”
While no one can predict the movement of personal loan interest rates in 2015, we know from history that they tend to rise as the fund rate goes up. This is how the Federal Reserve’s actions “trickle down” to consumers.
Some have speculated that the current policy could remain in place until summer 2015, at which point the Fed will change course. Some expect the change to come sooner.
“The markets assume that it will happen in summer,” said Richard Fisher, president of the Dallas Federal Reserve. “I think it could happen earlier — but of course I could be wrong.”
Other Fed members feel that rates have been too low for too low, and that a continuation of this policy could send the U.S. economy into another recession. Charles Plosser, head of the Philadelphia Federal Reserve Bank, is among those concerned. According to Plosser: “There is no precedented history to have rates at zero. I think we are really behaving in a way which is outside of historical norms and that should make us nervous.”
Higher Personal Loan Rates for Borrowers With Bad Credit
There is some degree of uncertainty regarding the future movement of personal loan rates in 2015. It’s an unknown variable. But one thing is for certain. People with lower credit scores will probably end up paying higher interest costs on their loans. This is due to a concept known as risk-based pricing.
A definition is in order. Risk-based pricing is when lenders offer different rates to different borrowers, based on the estimated risk that a consumer will fail to pay back the loan. In short, riskier borrowers tend to pay more in interest for personal loans, credit cards, and other forms of financing. Low-risk borrowers, on the other hand, tend to pay less.
How do banks and lenders measure risk? According to the Consumer Financial Protection Bureau: “Each lender uses its own process to determine the risk that you will default on a loan, but most use your credit score, employment status, income, and other outstanding debts, among other factors.”
There is a particularly broad spectrum when it comes to personal loans. In 2015, borrowers could secure interest rates anywhere between 7% and 30% (or higher), depending on their credit scores and other risk factors. This is why it’s so important to maintain a good credit score, especially if you plan to apply for some kind of financing in the near future. It can significantly affect your borrowing costs.
Disclaimer: This story contains forward-looking statements (predictions, projections) regarding personal loan interest rates in 2015. Such statements reflect the views of the authors / speakers and should not be construed as facts. The publishers of this website make no guarantees about future economic conditions or loan rates. Interest costs vary widely based on the type of financing and the borrower’s qualifications.