According to Bankrate, the average personal loan rate was 10.82% in April 2023. At the same time, you can expect to get higher or lower interest rates depending on several factors, such as your credit score, income, and other unique financial details. Personal loan rates generally range from 4.99% to 35.99%. But what should you expect from them in the near future? Here’s a personal loan forecast for 2023.
What Are Personal Loans?
A personal loan is an unsecured form of borrowing that people use when they need to cover various personal needs. Typically, lenders don’t set any use restrictions when it comes to personal loans. This means that they don’t track what you spend the money on.
Personal loans are known for reasonable loan amount limits and flexible terms. Depending on your income, you can get up to $50,000 and repay the money in 12 to 60 months. As an interest rate is usually fixed, your monthly payments will be predictable. Your total loan cost (loan proceeds plus total interest cost) will be equally divided by the number of months of your repayment period.
As personal loans are unsecured, they don’t require a borrower to provide collateral. Thus, these loans carry less risks to a borrower. However, the lack of repayment guarantee results in more strict requirements. Thus, a borrower must have good credit and provide a set of documents to confirm steady income.
Personal Loan Features
Here are some major personal loan characteristics:
- Loan amounts suit almost any life project. You can get up to $50,000, and sometimes even up to $100,000, for a variety of reasons;
- Flexible repayment terms. By choosing shorter or longer payback periods, you can affect your loan payments, making them affordable for your budget;
- Competitive interest rates. Personal loans are typically capped at 36% for borrowers with questionable credit backgrounds;
- Strict eligibility requirements. You need to demonstrate good credit and gather all the required documents to qualify;
- Hard credit checks. Personal loan lenders always check your credit history through major credit bureaus. This can result in a credit score drop;
- Funding may take some time. As lenders need to verify your creditworthiness, it usually takes a couple of days to get a loan decision. Sometimes you can even wait for weeks before you get approved.
Personal Loan Rates in 2022
Over the last 40 years, the pace of interest rate increases in the financial industry has been the fastest in the past year. Despite this, personal loans experienced a significant surge, reaching $210 billion. This was a 34.1% increase compared to 2021. This growth was mostly because of the stability that the personal loan market demonstrated for most of 2022.
Additionally, lenders expanded their coverage to include more borrowers with below-prime-risk credit scores. This step also led to an increase. In 2021, some lenders tightened their lending standards due to the negative impact of COVID-19. This way, it became more difficult for some borrowers to obtain personal loans. However, in 2022, some lenders went in the opposite direction as the economy improved.
What to Expect from Personal Loans in 2023?
While many lenders relaxed their lending standards to contribute to economic recovery in 2022, it is unlikely that 2023 will experience the same increase in personal loan applications. Borrowers with poor credit will be particularly affected. This has been evidenced by the high interest rates that borrowers with scores between 300 and 689 have been receiving.
Thus, if you have less-than-perfect credit, you can expect to get an interest rate between 17.80% to 33%. Experts think that we will face an increase in interest rates for people with bad credit.
Factors That Impact Your Personal Loan Interest Rate
There are several factors that can impact your loan cost. Here are the major ones that you need to pay attention to:
- Credit score. The higher your credit score, the better interest rate you can get. Good credit typically shows that you can manage your finances well and have a strong history of on-time payments. Your credit score consists of payment history, credit utilization, credit mix, length of credit history, and new credit;
- Type of loan. Secured loans usually offer lower interest rates as they require you to provide a repayment guarantee. Unsecured loans are usually more expensive;
- Debt-to-income ratio. A lender will check the amount of your monthly debt and compare it with your gross monthly income. The lower this ratio, the better interest rate you can get;
- Loan amount. Smaller loan amounts usually come with higher interest rates. Thus, you need to choose an optimal loan size to get a better rate.
Are Personal Loans Easy to Get?
Personal loans usually have strict requirements, so they are not very easy to get. If you have good credit, you’re more likely not to face a problem. But borrowers with less-than-ideal credit scores will be considered risky. This way, they may either get loans with higher interest rates or even get rejected for a loan.
What Are Personal Loan Alternatives?
There are several options that may suit people with bad credit or those who are looking for a faster and simpler financial solution.
Secured Loans and Lines of Credit
“Subprime” borrowers can get reasonable loan terms by providing some valuable assets as collateral. The most common forms of collateral are a house, car, and savings account balance. Secured loans can be of various kinds and forms. Here are the most popular ones:
- Home equity loans. These loans use your equity in the house as collateral. This way, you can borrow against your house’s estimated value. Typically, lenders allow you to get up to 85% of your equity. Loan terms can reach 30 years. You will get the whole loan amount on hand and will be obliged to repay it equally each month;
- Home equity lines of credit (HELOCs). A HELOC is something between a home equity loan and a credit card. They also use the amount of your equity as collateral but provide a revolving credit line that you can use within the limit. Interest rates accrue only on the amount that you actually use. This form of borrowing gives you more flexibility. You decide when and for what to use the money and always have the needed amount on hand;
- Title loans. They are short-term loans that use your vehicle as a pledge. Typically. You can borrow up to 50% of your car’s value. You must repay the money in as little as 30 days. Otherwise, a lender can repossess your automobile;
- Share secured loans. This form of borrowing allows you to take out money against the balance of your savings account. Withdrawing money from your savings account results in losing out on your future dividends. Share secured loans allow you to avoid such an outcome and get the money you need at reasonable rates;
- Secured credit cards. Secured credit cards can be a great option to build or improve credit. They work similarly to regular credit cards but
Credit Cards
A credit card allows you to access the amount as needed within your credit limit. The credit limit is typically set based on your income and credit score. You can make purchases by card or even get a cash advance by withdrawing a certain amount from your credit card balance.
A cash advance typically has a higher interest rate than those on your regular purchases. Additionally, when you buy something, you typically have an interest-free promotional period, so you can save money on interest if you repay the funds within the set times. Otherwise, you can make a minimum payment, which is usually 5% of your outstanding balance, and face interest on the remaining purchase amount. When it comes to a cash advance, interest accrues immediately.
Payday Loans
Payday loans are short-term, high-interest loans that borrowers can get regardless of their credit. These loans are unsecured and have no minimum credit score requirements. Additionally, they don’t require borrowers to go through hard credit checks. As it may sound tempting, you need to be aware of the high interest rates these loans come with. An APR may be even over 400%.
However, they are also limited in terms and amounts. You can get only up to $1,000 ()or even less in some states) and repay the money within 2 to 4 weeks. Also, payday loans are banned in some states as they are considered a predatory form of borrowing.
Borrowing from Family
If you need a small amount and don’t want to overpay, you can ask your loved ones to help you overcome tough times. Borrowing from family or friends is one of the cheapest ways to get extra cash. This is because your loved ones can lend you money free of charge or set a very low interest rate. But make sure to repay the funds on time. Otherwise, it can negatively affect your relationship.