Interest Rates Are Up. Should You Consolidate Your Debt With a Personal Loan?

The Federal Reserve has been on a mission to cool inflation. To accomplish that goal, the central bank has raised interest rates 10 times since March of 2022.

To be clear, the Fed is not tasked with setting consumer interest rates directly. Rather, it oversees the federal funds rate, which is what banks charge each other for short-term borrowing.

However, when the Fed raises its benchmark interest rate, the federal funds rate, it tends to make it more expensive for consumers to borrow. So if you're carrying a balance on your credit cards, for example, you may find that the interest rate on your debt is higher than it was in the past. The same might hold true if you're in the process of paying off a HELOC.

In fact, a reason credit card and HELOC balances are a big problem right now is that they tend to come with variable interest rates. So it may be a good time to consolidate your variable-interest rate debt with a personal loan.

Personal loans offer the benefit of fixed interest rates and fixed monthly payments, which can make them a lot easier to manage. But while consolidating your debt with a personal loan could be a good option, you'll need to make sure that makes sense for you.

Make certain you'll come out ahead financially

If you're juggling multiple debt payments each month, the simple act of consolidating them by getting a personal loan could make your life a lot easier. And chances are, the interest rate you'll be eligible for on a personal loan will be lower than what you're paying on your credit cards.

But the rate you get on a personal loan may or may not be higher than what you're paying on a HELOC. You'll need to look at the numbers as they apply to you.

Also, see what your credit score looks like. Personal loans are unsecured, so lenders put a lot of emphasis on credit scores when determining rates. If your score isn't in the best shape, you may not end up with a very competitive interest rate on a personal loan.

Explore other options, too

If the only kind of debt you're juggling right now is a few different credit card balances, it may be worth it to see if a balance transfer offer makes more sense than a personal loan. Many of these offers come with a 0% introductory rate that can buy you a reprieve from paying interest for 12 months or longer.

If you qualify for an extended 0% introductory rate and plan to work a second job or do something in the near term to come up with more money for debt payoff purposes, then this route could make more sense than a personal loan. But again, it's a good idea to explore all of your options for consolidating debt at a time when interest rates are high. A little research could help you land on the most manageable and cost-effective decision.