The Fed’s Effect on Personal Loan Rates Explained

The Federal Reserve often makes headlines for its decisions about interest rates.

But knowing how Fed rate changes impact consumer loans — whether it chooses to cut rates, increase them, or take no action — can help you make better borrowing decisions. Learn exactly how Fed rate changes can affect personal loans and what you can do to improve your chances of getting the best personal loan rate. 

How does the Federal Reserve impact personal loans?

To address how Fed rate decisions affect personal loans, we need to first dive into how the Fed works.

The Federal Reserve holds multiple Federal Open Market Committee (FOMC) meetings every year. At those meetings, one of the things that Fed board members do is decide if they’ll raise, lower, or maintain the federal funds rate (the interest rate that banks charge to borrow from each other). 

The Fed’s decision typically has a direct or indirect impact on a variety of loans and financial accounts that many people have, such as: 

• Personal loans
• Auto loans
• Mortgages
• Certificates of deposit (CDs)
• High-yield savings accounts
• Home equity lines of credit (HELOCs)
• Home equity loans

Generally speaking, the average personal loan rate tends to be higher than the fed funds rate, but typically follows the funds rate’s ups and downs:

Historic federal funds and personal loan rates

What happens when the Fed cuts rates?

In general, a Fed rate cut means interest rates will drop for loans and deposit accounts. How quickly and how much those rates change can vary — it’s not the same across all loans and accounts. 

For example, if the Fed decides to cut rates by 25 basis points, it doesn’t necessarily mean that the average personal loan rate will fall by the same amount or that loan rate changes will happen the same day as the rate cut.

“If the Fed lowers rates, lenders (banks and institutions) can usually access funds more cheaply because the rates to borrow that money are lower, so in turn they can pass some of those savings to borrowers,” says Gloria Garcia Cisneros, wealth manager at Lourd Murray.

What happens when the Fed raises rates?

If the Fed decides to raise rates, it usually means that you’ll see loan rates and deposit account rates rise at some point. While a Fed rate increase typically leads to higher borrowing costs, it generally means that the APY (annual percentage yield, meaning the interest earned in a year) for CDs and high-yield savings accounts increases, too.

It’s important to remember, though, that loans and deposit accounts don’t always follow Fed rate cuts or increases, says Marcus Sturdivant, Sr., managing member at financial planning firm The ABC Squared. 

“Mortgage rates tend to follow the direction of the Fed fund rate, but we saw a situation a year ago where the Fed had a jumbo cut and two normal cuts for a total of 100 basis points, and mortgage rates went in the opposite direction,” Sturdivant says.

Tips to ensure you get the best rates

Fed rates are just one aspect of the multiple factors that determine your personal loan rate. 

“It's good to know that this is not the only factor that goes into determining the interest rate you are offered; other things like your credit score, other debt, income figures, and any promotions that are offered by the institution also matter, so keep that in mind,” Cisneros says. 

Here’s how to ensure you get the best rates possible: 

• Improve your credit score: Simple steps like paying credit card balances down to under 30% of your credit limit, correcting errors on your credit report, and making on-time payments can improve your score over time. Increasing your score from a 650 to a 680 could potentially lower your personal loan interest rate by several percentage points, based on Credible personal loan interest rate data. 
• Compare offers from multiple lenders: Personal loan lenders have different criteria and underwriting for borrowers, so interest rates can vary from company to company. Get prequalification quotes from at least three different lenders to give yourself the best chance at finding a competitive rate.
• Choose a shorter repayment term: In general, shorter repayment terms have lower interest rates since the lender takes on less risk.
• Get a secured loan: Secured loans require collateral. In the event you don’t repay your loan, your lender can take the collateral. Because secured loans present lower risk for lenders, secured interest rates tend to be lower than rates for unsecured loans. 
• Get a joint loan: Joint personal loans let you apply for a loan with another applicant whose credit score is factored into your interest rate. So, if your co-applicant has a higher score than you, there’s a chance you could get a better rate than if you applied on your own. Remember, though, that your co-applicant is equally responsible for loan payments and shares in loan proceeds. 
• Refinance if rates drop: Sometimes, factors like Fed rate changes can lower personal loan interest rates. If you took out a loan when rates were high, you might be able to refinance with a lower rate. 

Should you wait on a Fed rate change to get a personal loan? 

Generally speaking, it’s not a good idea to try to time the market when taking out a personal loan.

“It can be like trying to guess what [a] crystal ball will say if you are waiting to take action based on what the Fed will do,” Cisneros says. “Rate moves are hard to predict, and lenders don’t always adjust rates right away, so you could be left waiting [to borrow] for longer than you expected.”

How often does the Fed change interest rates?

While the FOMC meets on a set schedule every year (in most cases), it doesn’t mean they’ll make changes to the Fed interest rate. For example, the Fed met six times from January to August 2025 and chose not to change the Fed rate.

Typically, rate changes take place as part of a Fed effort to influence the economy. In general, the Fed will lower rates if the economy is lagging or in a recession, since lower rates usually increase borrowing. The inverse tends to be true, too: The Fed raises rates if inflation is getting too high, as higher rates tend to decrease borrowing. 

Since rate changes are based on economic factors, there’s no set number of rate changes that happen each year. For example, here’s how many rate changes have taken place each year since 2020: 

• 2025: 1 (as of September, 1 cut)
• 2024: 3 (all cuts)
• 2023: 4 (all increases)
• 2022: 7 (all increases)
• 2021: N/A
• 2020: 2 (all cuts)

The Fed held the benchmark interest rate steady at near zero throughout 2021, citing concerns about slowing the post-COVID economic recovery. The target range was between zero and 0.25%.

Recent updates to the Federal Reserve interest rate

Until September’s rate cut of 25 basis points, the Fed hadn’t made any rate changes since late 2024. On several occasions this year, Fed Chairman Jerome Powell said that the Fed wanted to wait on rate changes until it could see how the economy fared amid various factors such as tariff changes and the labor market.