Will Personal Loans Get More Expensive in 2023?

There's reason to think they could.

If you need money, whether to cover a home repair, renovations, or medical bills, you may be inclined to turn to a personal loan. The great thing about personal loans is that you're not locked into financing a specific asset -- whereas with a mortgage, for example, you can only use your loan proceeds to finance a home purchase.

Personal loans also tend to offer the benefit of relatively affordable interest rates. And that's important, because the lower the interest rate on your loan, the less money you end up spending when you borrow.

But while it's easy to see the appeal of personal loans, they may not be your best borrowing option next year. That's because personal loan interest rates could rise, making these loans a less affordable route than usual.

Why personal loan interest rates could rise

There are different factors that determine what rate you get on a personal loan. One factor is your credit score, and it's a big one.

Because personal loans are unsecured -- meaning, not tied to a specific asset -- lenders rely on your creditworthiness as a borrower when giving out that money. The higher your credit score, the less risk a lender thinks it's taking on. And lenders tend to reward lower-risk borrowers with lower interest rates.

But another factor that goes into personal loan interest rates is general market conditions. And there's reason to believe borrowing will be more expensive across the board next year.

The Federal Reserve has been aggressively hiking up interest rates in an effort to cool down inflation and give consumers some much-needed relief. When rates go up, people tend to borrow less money, and that could lead to a decline in spending. And while that might seem like a bad thing, we actually need spending to slow down a bit so that supply chains can catch up to demand and prices can come down.

But while higher borrowing rates might help slow the pace of inflation, they're apt to make life more difficult for consumers -- namely, by leading to higher monthly loan payments. And so that's a good reason to potentially steer clear of a personal loan next year. Signing one could mean paying a lot more interest than usual.

Other borrowing options to look at

While personal loans can be quite affordable, next year, you might pay more. And so if you own a home, it pays to compare personal loan rates against home equity loan rates and see which option lets you borrow most competitively.

A lot of people are sitting on large amounts of equity in their homes since property values are up on a national level. And so if you're in that boat, it pays to see if a home equity loan will lead to lower monthly payments than a personal loan will.

On the other hand, if you don't own a home, then a personal loan could really end up being your most affordable bet in 2023 -- even if you get stuck with a higher rate through no fault of your own.