Millions of borrowers have taken advantage of unsecured personal loans over the past 15 years as fintech lenders, as well as traditional banks, began to leverage technology to more effectively and efficiently lend to consumers, especially online. There are currently 25 million consumers with at least one personal loan in 2022, according to Experian data.
Personal loans typically range in size from a few thousand dollars to as much as $100,000, and are repaid over terms that commonly last three to five years. Personal loans usually have a fixed annual percentage rate (APR) that remains the same for the life of the loan and is not affected by Federal Reserve interest rate changes.
That stability is likely exactly what's renewing consumer interest in fixed-rate personal loans. Along with inflation increasing the cost of goods, APR hikes are making it more expensive to finance purchases over time. This has been felt most acutely by those who commonly use credit cards, which typically have variable APRs. When the federal funds rate increases, so does the interest on any variable-rate credit card debt that's being carried from month to month.
Federal Funds Target Rate Since 2018
This year, the Fed raised the key federal funds rate by 2.25 percentage points, to 2.50%, in just a 90-day period. By comparison, the last series of rate hikes, which began in 2015, took 42 months of slower increases overseen by then-Fed Chair Janet Yellen to reach 2.50%.
Which brings us back to personal loans. Using Experian data, we looked at the growth rate of personal loan accounts and average balances over the past decade. When the Fed began to increase rates, at the end of 2015 and the beginning of 2022, average personal loan balances were higher, in percentage terms, than in previous years.
Annual Change in Average Balance, 2012-2022
There are likely multiple explanations for these larger-than-usual average balance increases. An increase in new personal loans made by lenders would result in an increase in average loan balance, as newer loans are naturally larger than loans borrowers have been paying down for several years. And indeed, the number of personal loan accounts has increased by 16% to 25.1 million over the past year, according to Experian data.
But a fixed-rate debt consolidation loan, often cited by borrowers as the reason they take a personal loan, appears to be a driving factor. Also, headline inflation—like the kind we're experiencing now at the supermarkets and gas pumps—can be a spur to consumers thinking about refinancing the more expensive credit card debt they carry.
Interest Rate Increases and Demand for Personal Loans
Debt consolidation is consistently the primary reason consumers seek and take personal loans. By paying off high-interest credit card balances with a lower-rate personal loan, consumers can save on interest.
But the rate a consumer receives for a personal loan offer will be guided by their credit score. The good news, for many, is that credit scores have increased over the past 10 years, suggesting that more borrowers may potentially receive a rate that can save them money in interest charges over time.
Methodology: The analysis results provided are based on an Experian-created statistically relevant aggregate sampling of our consumer credit database that may include use of the FICO® Score 8 version. Different sampling parameters may generate different findings compared with other similar analysis. Analyzed credit data did not contain personal identification information. Metro areas group counties and cities into specific geographic areas for population censuses and compilations of related statistical data.
FICO® is a registered trademark of Fair Isaac Corporation in the U.S. and other countries.