What are the trends likely to be for personal loan rates in 2016? As the late John Kenneth Galbraith, a distinguished Harvard economics professor, once observed, "The only function of economic forecasting is to make astrology look respectable."
He was right. That holds true, even when economies are jogging along nicely and trends are moving smoothly in a single direction. At the time of writing, most economies are stumbling, and trends can be soaring one minute only to plummet the next.
Nowadays, almost all "unsecured" debts (when you don't have to put up your home or other assets as collateral or security) come with variable or adjustable rates. That excludes student loans, which come with an option to fix or float your rate, but applies to unsecured personal loans (a.k.a. signature loans) and credit cards. Many home equity lines of credit (HELOCs) have variable rates too, even though they're secured.
The good thing about variable rates is that they're usually lower to start with than fixed ones. And, if interest rates remain low, your borrowing can be very affordable. Since interest rates crashed following the credit crunch, many consumers have benefited from continuing low variable rates. However, they come with a real threat because you can face painfully higher monthly payments if they suddenly shoot up.
If you have an existing variable-rate loan or are thinking of applying for one, you're going to be very interested in 2016's personal loan rates and how they might move.
How Personal Loan Rates Work
When it comes to the interest rates payable, your personal loan (or credit card or other variable-rate loan) agreement should usually specify two key components:
- The "prime rate" it uses
- The "spread," which is the amount over the prime rate you have to pay, mostly based on your credit score and report
That prime rate is the one your lender would charge when it lends to its most creditworthy customers, mostly the sort of successful global corporations everyone's heard of. Because you are a mere mortal and therefore present a bigger risk, you have to pay more: the prime rate plus your spread, which can exceed 20 percent for certain types of borrowing (some store cards) or if your credit's shot. On personal loans, the spread is usually much lower than that.
Your loan agreement should specify which prime rate applies to your borrowing. If it says the WSJ prime rate, that's the one published daily by the Wall Street Journal. The WSJ prime rate was stuck at 3.25 percent for a very long time, and increased to 3.50 percent when the Federal Reserve hiked its rates in December 2015.
Prime rates are closely tied to the federal funds rate, which is one of the ones set by the Fed. Whenever the central bank hikes its rates, you can be pretty certain the prime rate on which your payments are based is going to go up too. Normally, unless you make late payments or otherwise breach your agreement, your spread won't be affected, so your rate will move closely in line with the Fed's.
A Gentle Rise Is Less Certain
Right up until the end of 2015, most mainstream economists were confidently forecasting that interest rates in general would gently drift upward this year. The Federal Reserve had announced plans to hike its rates four times in 2016, and many thought each of those would see a 25 basis point increase. A basis point is one hundredth of 1 percent, so that would see a 10 percent personal loan rate at the start of the year increase to 11 percent by the end.
Then Galbraith's law kicked in, and the first weeks of 2016 saw turmoil in global markets. In particular, those were spooked by the prospect of a global slowdown led by China, and a destabilizing glut of oil. At the time this is being written (mid-January), those forces seem irresistibly strong, and even some previously hawkish Fed officials are speculating that the planned hikes won't proceed on schedule. A few economists even wonder whether December's increase might have to be reversed, which would see a return to 2015's ultra-low and highly attractive personal loan rates.
Of course, it's equally possible the world's current economic problems will blow over, and the Fed will be able to stick to the scheduled increases it's already announced. What does seem unlikely is a rise this year much higher than the 1 percent mentioned above. But you might want to check that with your astrologer.