Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.
How fed interest rates affect personal loans
You might want to pay extra attention if you have a variable-rate loan.
You might’ve heard that the Federal Reserve increased or decreased its rate — and that it could impact the cost of financial products like personal loans. But how it affects your loans depends on the type of interest rate you have and whether you’ve already applied for financing or not.
How does the fed rate affect personal loans?
A federal rate change directly affects the interest rates banks charge on all new personal loans and some current personal loans. With current loans, how it affects you depends on what type of interest rate you have.
How does the fed rate affect variable-rate loans?
Changes in the fed rate affect both new and current variable-rate loans. With new loans, an increase or decrease means you’ll start off paying either higher or lower rates than you would have before.
But since variable-rate loans fluctuate based on the lending market, a change in the federal rate will also cause interest rates on your current loan to go up or down.
How does the fed rate affect fixed-rate loans?
Changes in the federal rate only affect new fixed-rate loans. An increase in the fed rate typically means banks and other lenders will increase their fixed rates. Similarly, a decrease in the fed rate generally sees a decrease in interest rates banks charge.
Since fixed rates stay the same over the life of the loan, any changes to the fed rate after you sign your loan documents have no affect on your current loan.
What’s the fed rate?
The fed rate, also known as the federal funds rate, is the benchmark rate the Federal Reserve uses to lend banks money. To understand the fed rate, you first need to understand how the Federal Reserve works.
The Federal Reserve is the US central bank. It’s responsible for keeping the economy stable by controlling inflation and encouraging employment. One of the ways it influences the economy is through the rates it charges when it lends to banks.
As a benchmark rate, the fed rate is the lowest rate it charges when it makes loans to banks. When the Federal Reserve lowers rates, banks can afford to charge lower rates. When the Federal Reserve increases rates, banks also increase interest rates.
Why does the fed rate change?
The Federal Reserve changes interest rates mainly to maintain a stable economy. So if the economy is doing well, Federal Reserve rates typically increase to prevent inflation. When the economy is doing poorly, the Federal Reserve lowers rates.
The Federal Open Market Committee meets eight times a year to discuss whether or not the Federal Reserve should raise rates.
What’s the current fed rate?
The current fed benchmark rate is 0–0.25%, as of March 16, 2020.
What happens when the Federal Reserve changes rates?
When the Federal Reserve changes its benchmark interest rate, interest rates on new and variable-rate financial products change. That’s because banks must charge a higher interest rate to make a profit, so when the Federal Reserve changes its interest rates, so do banks.
Compare personal loans
How else can a fed rate increase impact me?
The fed rate doesn’t just have an impact on personal loans — it affects most financial products that come with an interest rate or yield rate. Here’s how:
- Credit cards. Credit cards typically come with variable rates, so any change to the fed rate should impact the rate on both new and current credit cards.
- Mortgages. Variable-rate mortgages and new mortgages can see an increase or decrease in interest rates along with the fed rate. Current fixed-rate mortgages are unaffected.
- Car loans. Variable-rate and new auto loans also go up or down with the fed rate, but current fixed-rate car loans stay even.
- Student loans. Congress sets federal student loan rates, so they’re usually not directly affected by the fed rate. However, variable-rate and new fixed-rate private student loans are impacted by the fed rate.
- Savings accounts. The annual percentage yield on high-rate savings accounts may increase as the fed rate increases — and vice versa.
If you already have a personal loan, the fed rate might not have any impact on how much you pay in interest. However, if you’re thinking of getting a new loan or have a variable-rate loan, trends in the fed rate could be worth paying attention to.
Find out more about how it all works by reading our guide to personal loans.
Frequently asked questions
More guides on Finder
Small business loan interest rates are low — but will it last?
Business loan interest rates dropped in 2020 and are likely to stay low. Here’s why.
Third Federal Savings & Loan home equity review
Get a low rate guarantee, but you won’t know if you’re eligible until you apply.
PenFed Credit Union home equity review
Get a line of credit with low closing costs — but you can’t apply online.
BECU home equity review
Get fixed- and variable-rate options in a HELOC, if you qualify for membership.
How to buy Bitcoin (BTC) in the US
Want to buy bitcoin but don’t know where to start? This comprehensive guide provides step-by-step instructions on how and where to buy BTC in the US.
AppleTree Credit Union home equity review
Get low rates with minimal fees — if you qualify for its limited membership.
Bitcoin price drops as US hikes interest rates – are they connected?
Bitcoin dips as Federal Reserve chairman Jerome Powell announces interest rate hikes earlier than expected.
A beginner’s guide to retirement investing
What you need to know to start building your retirement nest egg.
5 must-read VA home loan tips from the experts
Find insight on VA home loans from experts. Learn what to do if you are denied and the data behind VA loan denials.
Compare $50,000 business loans
Find $50,000 loans for all purposes, even if you’re a startup or have bad credit.
Ask an Expert