Personal Loans Slowed Down in 2022. Could This Be the Reason Why?

A personal loan may not be as affordable as you'd expect.

There's a reason personal loans have long been popular with consumers. With a personal loan, you can borrow money for any purpose, whether it's to renovate your home, fix up an aging vehicle, or start a small business. Plus, the interest rate you'll pay on a personal loan will generally be much lower than what a credit card will charge you.

But personal loan originations slowed down in 2022, according to recent data from VantageScore. In December 2021, the percentage of consumers with new personal loan accounts was 3.43%. In December 2022, it was just 2.8%.

Why the decline? Much of it might boil down to the higher cost of borrowing across the board.

Borrowing rates are way up

Last year, the Federal Reserve implemented several aggressive interest rate hikes in an effort to slow the pace of inflation. In doing so, it drove the cost of borrowing up across the board.

These days, consumers are looking at higher borrowing rates on everything from auto loans to personal loans to home equity loans. And that's intentional.

The Fed wants to drive a slowdown in consumer spending to narrow the gap between supply and demand that's been causing inflation to surge. And if it's more expensive to borrow money, consumers are apt to want to borrow less -- and spend less as a result. Since personal loan originations were lower in late 2022 than in late 2021, it's fair to assume that higher borrowing rates played a role.

Recession fears could have made a difference, too

Last year, financial experts were quick to warn consumers about a potential recession in 2023. Some consumers may have taken those warnings to heart -- and avoided taking on new debt as a result.

To be clear, that's certainly a good thing, not a bad one. While personal loans can be easier and more affordable to keep up with than, say, credit card balances, at the end of the day, consumers who sign one still owe money on a regular basis. And making a monthly loan payment is difficult in the absence of a job. Since recessions tend to go hand in hand with layoffs, it makes sense that personal loan activity may have declined due to economic concerns.

Is it a bad time to take out a personal loan?

The fact that personal loans slowed down in 2022 isn't that surprising. And it may be a sign that consumers are starting to borrow more conservatively on a whole.

That said, a personal loan could still be an affordable way to borrow, so consumers in need of money don't have to rule them out in 2023. They just need to proceed with caution, especially since borrowing costs are still high and those recession warnings haven't gone away.

Meanwhile, because borrowing rates are up right now, it's important to shop around for a personal loan and compare interest rates on them. A little research could result in a lot of savings at a time when these loans are costing more.