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One Reason a Personal Loan Could Be Your Best Borrowing Option This Year

The Ascent logo The Ascent 6/20/2022 Maurie Backman
Three people looking at a document. © Getty Images Three people looking at a document.

Any time you borrow money, whether in the form of a mortgage, an auto loan, or a credit card balance, you generally sign up to pay interest on the sum you're borrowing. Now some loans come with fixed interest rates, which means they can't change over time. Other loans come with variable interest, so your rate could change through the years.

Personal loans happen to fall into the former category -- the interest rate you pay on a personal loan is generally fixed. And given today's borrowing environment, that's a very important thing.

A good way to avoid unwanted surprises

One of the best things about personal loans is that they let you borrow money for any purpose. Want to start a business? You can use a personal loan to get your venture off the ground. Want to renovate your home or finish your basement? A personal loan could make that happen.

Just as significantly, the interest rate you lock in on a personal loan is generally the rate you pay until your balance is whittled down to zero. And these days, that really makes the case to choose a personal loan over competing loan products.

See, the Federal Reserve is moving forward with a series of planned interest rate hikes. The reason the Fed is raising rates is to try to slow down the rate of inflation, which has soared since the start of 2022. 

As the Fed raises interest rates and borrowing gets more expensive, the thought is that consumers will start cutting back on spending. Once that happens, the demand for goods won't grossly exceed the available supply. And from there, the cost of goods can start to come down. 

Now to be clear, the Fed doesn't directly set consumer interest rates, like mortgage or credit card rates. But when it raises its federal funds rate (the rate banks charge each other for short-term borrowing), consumer interest rates tend to follow suit.

Since rates are expected to keep rising, anyone looking to borrow money should really try to lock in a fixed-rate loan. And personal loans fit that bill. But other borrowing products don't.

So, say you're looking to do home improvements. You may be inclined to take out a home equity line of credit, or HELOC, to finance your upcoming project. But HELOC interest tends to be variable, so your borrowing costs could climb over time. 

Similarly, you may have a credit card with a 0% introductory APR. If you use it to finance your project, you might avoid interest for a limited period of time. But from there, your rate could climb, and astronomically so.

It's all about peace of mind

Taking out a personal loan could help you avoid the stress that comes with seeing your monthly payments increase due to rising rates. It pays to shop around for a personal loan and see what rate you qualify for. But you may want to act quickly, before it becomes more expensive to take one out.

The Ascent's best personal loans for 2022

Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing The Ascent's best personal loans for 2022.

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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