How Rising Interest Rates Affect Your Personal Loan: What Borrowers Need to Know in 2025

Photo by Jonathan Cooper on Unsplash

Understanding the Relationship Between Interest Rates and Personal Loans

In 2025, personal loan interest rates are notably higher than in previous years, affecting millions of borrowers across the U.S. Whether you’re considering a loan to consolidate debt, cover an emergency, or finance a large purchase, it’s crucial to understand how rising rates influence your options and overall costs.

What Drives Personal Loan Interest Rates?

Personal loan rates are closely tied to the federal funds rate, which is set by the Federal Reserve. When the Fed raises its benchmark rate, lenders face higher borrowing costs, which are then passed on to consumers in the form of increased interest rates on loans, including personal loans. As of July 2025, the Federal Open Market Committee (FOMC) has kept the federal funds target rate steady at 4.25% to 4.5%, after several rate cuts in 2024. However, the elevated benchmark means that personal loan rates remain high compared to the historic lows seen in 2020 and 2021 [2] .

Current Personal Loan Rate Landscape

Average personal loan rates for August 2025 exceed 12.5%, with the best rates reserved for borrowers with excellent credit profiles. For example, borrowers with good credit (scores between 690 and 719) are seeing average rates around 14.48%, while those with excellent credit may be able to secure rates below 6.5% with select lenders [1] [4] . On the other hand, borrowers with lower credit scores face significantly higher APRs-sometimes exceeding 100% for subprime applicants [5] .

How Higher Rates Affect Borrowers

The impact of rising interest rates on personal loans is immediate and tangible for most consumers. Higher rates mean:

• Increased Monthly Payments : Even a small uptick in rates can result in noticeably higher monthly payments on new loans. For example, a $10,000 loan with a 12% APR over five years costs about $222 monthly, while the same loan at 15% APR raises the payment to $238, resulting in over $1,000 in extra interest over the life of the loan.
• Reduced Loan Approval Odds : Lenders may tighten approval criteria during rate hikes, making it more difficult for applicants with fair or poor credit to qualify for favorable terms [1] . Subprime borrowers often face the highest rates and smallest loan amounts.
• Pressure on Household Budgets : As more income goes toward servicing debt, there’s less discretionary cash available for savings, investments, or everyday spending. This can trigger a cycle of financial strain, particularly for those already carrying credit card or other high-interest debt [3] .

Real-World Example: The Cost of Rising Rates

Suppose you borrowed $11,600-the average personal loan balance in 2025-with an APR of 14.48%. Over a five-year term, you’d pay nearly $4,700 in interest. If your credit score was lower and you faced an APR of 28%, the interest paid would exceed $10,000, nearly doubling your total repayment amount [5] .

Who Is Most Affected?

Borrowers with lower credit scores (<640) are hit hardest by rising rates. Their average APRs can be several times higher than those offered to prime borrowers. For example, someone with a score below 560 may face APRs over 200%, making personal loans an expensive option of last resort [5] . In contrast, those with excellent credit may still find competitive rates, especially by comparing multiple offers and considering both traditional banks and fintech lenders [1] .

How to Respond: Steps to Take When Interest Rates Rise

Navigating a high-rate environment requires a proactive approach. Here’s how you can minimize the impact on your finances:

1. Shop Around and Compare Offers

Interest rates can vary widely between lenders. Online platforms and credit unions may offer lower rates compared to big banks, particularly for those with strong credit. It’s advisable to request prequalification quotes from multiple lenders to identify the best available terms. Be sure to check each lender’s reputation and read the fine print for fees and penalties.

2. Improve Your Credit Profile

Since rates are heavily influenced by credit score, taking steps to boost your score can yield significant savings. Strategies include paying bills on time, reducing credit card balances, and avoiding new hard inquiries before applying for a loan. Even a modest increase in your score can move you into a lower rate bracket, reducing the overall cost of borrowing [4] .

3. Consider Alternatives to Personal Loans

Depending on your needs, alternatives may offer more favorable terms:

• Home Equity Loans/Lines of Credit : If you own a home and have substantial equity, these products often carry lower rates than unsecured personal loans-though they come with the risk of losing your home if you default [1] .
• Credit Card Balance Transfers : Some cards offer introductory 0% APR on balance transfers, but fees and post-promotional rates can be high.
• Borrowing from Retirement Accounts : This may be possible in specific circumstances, but it can jeopardize your financial future and carries tax risks. Consult a financial advisor before considering this route.

4. Time Your Loan Application Strategically

If you anticipate needing a loan but can wait, monitor market trends and the Federal Reserve’s policy signals. While rates are not expected to drop significantly in the near term, securing a loan before further increases may save money. Conversely, in a falling-rate environment, waiting could be beneficial.

5. Calculate Your True Borrowing Costs

Use online calculators from reputable financial websites to estimate monthly payments and total interest costs. This helps you budget accurately and avoid overextending your finances. For personalized guidance, consult with a certified financial planner or credit counselor. Many nonprofit agencies offer free or low-cost advice for borrowers considering new debt.

6. Understand Lender Requirements

Lenders may change their approval criteria during periods of high interest. Ensure you understand each lender’s requirements for income, employment, and credit history. Gathering required documents in advance can speed up the application process and improve your chances of approval.

How to Find and Apply for Personal Loans

To explore current offers, you can visit major comparison sites such as NerdWallet or Bankrate, both of which aggregate real-time loan data and provide educational resources. Alternatively, contact your primary financial institution or local credit union to inquire about their personal loan products. When comparing offers, pay close attention to:

• APR (annual percentage rate), which reflects the true cost of the loan including fees.
• Repayment terms -shorter terms mean higher monthly payments but less interest paid overall.
• Prepayment penalties or origination fees that can add to your total cost.

Practical Steps to Reduce Impact

Borrowers looking to minimize the effect of rising rates should:

• Borrow only what is necessary, avoiding excessive debt.
• Make extra payments when possible to reduce principal faster and cut interest costs.
• Monitor credit reports for errors and dispute inaccuracies promptly.

Key Takeaways for Borrowers in 2025

With personal loan rates remaining elevated, careful comparison shopping, credit improvement, and strategic timing are essential to limit borrowing costs. Always review all terms, consider alternatives, and seek reputable advice before committing to new debt. By understanding the current rate environment and acting proactively, you can make informed decisions and safeguard your financial health.

Photo by Jakub Żerdzicki on Unsplash

References

[1] Bankrate (2025). Personal Loan Interest Rate Forecast for 2025.

[2] Bankrate (2025). How The Federal Reserve Impacts Personal Loans.

[3] ATFCU (2025). Understanding the Impact of Rising Interest Rates on Your Finances.

[4] NerdWallet (2025). Average Personal Loan Interest Rates for August 2025.

[5] LendingTree (2025). Personal Loan Statistics: 2025.