Key takeaways

The federal funds rate impacts how expensive it is for lenders to loan money, so consumer loan rates typically change when the federal funds rate changes.

During the Federal Open Market Committee's December meeting, the regulatory body announced it would lower the federal funds rate by another 25 basis points.

While this change will not impact existing personal loan interest rates, new borrowers, especially those with good and excellent credit, will likely see starting rates dropping in the months ahead.

The fed funds benchmark rate impacts how much it costs for lenders to loan money, so it influences rates on consumer loans -- including personal loans. In September, the Federal Open Market Committee opted to lower the federal funds rate for the first time in four years. Two more smaller decreases followed it in November and December.

That said, Bankrate chief financial analyst Greg McBride predicts this change's immediate impact on personal loans will be minimal. "Having strong credit and comparing a variety of lenders will turn up the best deals but those won't necessarily change in concert with Fed moves," McBride says.

How does the Fed affect personal loans?

The federal funds rate influences the interest rates lenders offer to new borrowers because it impacts lenders' costs. When the rate is high, lending is more expensive. As the Fed introduced rate hikes throughout 2022 and 23, the average personal loan rate also increased.

However, at the close of the FOMC's December meeting, the committee announced it was cutting rates for a third time. The new target range is 4.25-4.5 percent. While individual lenders may begin lowering rates in anticipation of further federal funds rate cuts, the industry average remains near historic highs.

How the Fed impacts existing loans

The vast majority of personal loans are fixed-rate loans, meaning the interest rate remains unchanged from origination to when it's paid off. Borrowers with a fixed-rate personal loan will not see changes to their interest rate or monthly payments when the Fed raises or lowers rates.

That means if you lock in a low-interest fixed-rate personal loan, it won't change based on the federal rate.

Will personal loan interest rates start to decrease?

The short answer is that they should -- but it will take time, and borrowers with good to excellent credit will be the first to benefit. Some consumer loan rates have already ticked downward ahead of the cuts, including mortgage rates.

But McBride points out, "Personal loan rates haven't been particularly interest rate sensitive in previous rate cut or rate hike cycles, with rates for borrowers with good credit moving in a range much narrower than the scope of Fed moves."

Mark Hamrick, Bankrate senior economic analyst and Washington bureau chief, noted that the September rate cut was likely to be the first in a "steady drumbeat of cuts" from late 2024 to early 2025. He agrees with McBride that impacts are unlikely to be instantaneous.

"Because rates edged moved so high in response to historically high inflation, it will take some time to unwind much of that," Hamrick says. "As a result, borrowing rates will take some time to edge meaningfully lower as well."

McBride doubts that waiting to borrow will significantly impact the rates personal loan borrowers receive.

"The reality among many personal loan borrowers is that the loan is taken because the money is needed with some urgency," he notes. "Holding off for lower rates may not be an option and the savings from doing so isn't a game-changer. On a $5,000, 3-year loan, a difference of one percentage point in rate is less than $3 per month and less than $100 in total interest over the term."

How can you get an affordable loan despite high interest rates?

Personal loan interest rates are currently high, but the federal rate is not the only factor affecting your loan's cost. You can take several steps to help get the best deal possible, including improving your credit score and applying with a co-borrower.

"This is where shopping around among different lenders could really pay off," McBride adds.

Here are some of the steps you can take to get the best deal possible on your personal loan:

Shop around

Check your credit

Prequalify

Reduce your loan amount and repayment term

Apply with a co-borrower

Bottom line

Because personal loans are fixed-interest products, current borrowers will not be affected by the Fed's rate changes. While interest rates on new loans are unlikely to plummet soon, new borrowers can still qualify for competitive rates by improving their credit and shopping for the best deals. If rates do cool, borrowers with good and excellent credit who took out loans when rates were at their peak should consider refinancing their personal loans.

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