How The Federal Reserve Impacts Personal Loans

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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. The Federal Open Market Committee held the target rate steady at 3.50-3.75% in January 2026, following three quarter-percentage-point cuts in a row. Because personal loan rates for new borrowers tend to follow fed rate changes with a delay, they may continue slowly declining following this move.

The FOMC faces an unusual political and economic landscape as it makes rate decisions in 2026. Inflation lingers above the Fed’s 2% target, discouraging further cuts. On the other hand, the Trump administration has signaled its upcoming nominee for Federal Reserve chair will push for cuts.

The Fed is in a very good position to hold for a while and see how the economy actually evolves,” Loretta Mester, an adjunct professor at the Wharton School of the University of Pennsylvania and former Cleveland Fed president, told Bankrate. “The labor market has stabilized, and they need to keep policy a bit restrictive to help inflation move back down to 2%. It’s a good time to wait.”

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 2023, the average personal loan rate also increased.

Even after three consecutive rate cuts in 2025, the industry average remains near historic highs. The FOMC’s January decision to hold rates steady is unlikely to significantly budge the needle.

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, including mortgage rates.

However, observer opinions are mixed on whether further cuts are coming in 2026. Bankrate’s annual Interest Rate Forecast predicted three cuts worth 0.75 percentage points in 2026, while the Fed policymakers themselves see just one.

Effects on personal loan rates are unlikely to be dramatic, regardless.

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.

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

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.

Frequently asked questions

• What is the Fed?
  

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  The Federal Reserve is the central banking system in the United States. Its primary function is to promote and support a strong U.S. economy by regulating financial markets, managing the money supply and setting interest rates.

• When is the next Fed meeting?
  

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  The next Federal Reserve Open Market Committee meeting is scheduled for March 17 and 18, 2026.