Will Personal Loans Get More Expensive in 2022?

They might for one big reason.

When you need money in a pinch, whether to pay for a car repair, a medical bill, or to tide yourself over during a period of unemployment, tapping your emergency fund is generally your best bet. But if you don't have money in savings, a personal loan could be your next best option.

A personal loan allows you to borrow money for any purpose. You could take one out to cover a surprise bill, or you could take out a personal loan for a non-urgent matter, like renovating your home, buying furniture, or upgrading some electronics.

The upside of personal loans, besides their flexibility on how you spend your money, is that they tend to charge relatively competitive interest rates. In fact, you'll generally pay a lot less interest on a personal loan than you will by charging expenses on a credit card and paying it off over time. But this year, a personal loan might cost you more money for one big reason.

Borrowing rates could climb across the board

This year, consumers could end up paying more money to borrow in several capacities, from personal loans to mortgages to credit cards. The reason has to do with the Federal Reserve’s plan to raise its federal funds rate.

After keeping interest rates flat for several years to fuel the country's economic recovery following the COVID-19 outbreak, the Fed has announced plans to raise interest rates this year. Now, the Fed doesn't actually set consumer interest rates. Rather, it determines the interest rates that banks charge one another for short-term borrowing.

However, the Fed's decisions can definitely influence the way consumer interest rates trend. And so there's a good chance interest rates on personal loans will climb this year, the same way we can expect an uptick in interest rates across other borrowing categories.

Should you take out a personal loan this year?

If you need to borrow money at any point in 2022, you might consider a personal loan. But before you apply for one, think about whether there's a more affordable way to access the cash you need.

If you own a home and have equity in it, you could take out a home equity loan or line of credit (HELOC), both of which may charge less interest than a personal loan. You might also consider doing a cash-out refinance, where you borrow more than your existing mortgage balance and get the excess money in cash to use as you please.

If you don't own a home, you may find a personal loan is your most affordable option for borrowing money. But you should also know that the higher your credit score, the greater your chances of snagging a competitive interest rate on a personal loan -- and getting approved for one in the first place.

This isn't to say you can't qualify for a personal loan if your credit isn't so great. But if you go that route, you could end up paying a lot of interest, whereas a higher score will usually make taking out a personal loan more affordable.