Personal loans are versatile financial tools that can help improve your finances by allowing you to pay down existing debt, increase your earning potential, and even build your credit score. Even better, personal loans will likely get cheaper in the coming months – making 2025 a great time to explore using one to your advantage.
Since July 2024, the Federal Reserve has slashed interest rates from 5.5% to 4.75%. As interest rates decline, the average interest rate associated with personal loans should follow. Many economists expect rates to keep falling in 2025, including J.P. Morgan’s Global Investment Strategy Group, which stated:
“Of the 37 global central banks that we track, 27 are cutting policy rates, including every G10 central bank outside of Japan. We believe policymakers will continue to nudge rates lower. In the United States, bond market pricing implies an easing cycle that ends in the first quarter of 2026 with the policy rate near 3.5%.”
You can learn more about this topic by reading MoneyLion staff writer Kathy Hauer CFP®’s article Latest Federal Reserve Interest Cut: 5 Things You Should Know. Otherwise, let’s explore 5 ways that you can take advantage of falling interest rates by using a personal loan.
How the Fed’s policy impacts average personal loan rates
Current personal loan interest rates are heavily influenced by Federal Reserve policy, as changes in the federal funds rate ripple through the broader lending market and influence the rates consumers are charged.
When the Fed lowers rates to stimulate the economy, personal loan rates typically decline as a result. While market rates tend to provide a baseline, your actual personal loan rate will depend heavily on individual factors like your credit score, income, debt-to-income ratio, and loan term length.
Improving your credit score and financial health may help you secure the most competitive rates. Comparing different personal loan offers by various providers can also help you find the best possible rate. Learn more: How to get a low interest personal loan
What is a personal loan?
A personal loan is an unsecured loan provided by a bank, credit union, or online lender. If you’re approved for a personal loan then you’ll receive a lump sum of cash, which you’ll repay over a set period of time with interest.
Most loans – like mortgages or student loans – have very specific uses. But, personal loans give you a lot more flexibility.
MoneyLion can help you find and compare personal loan offers from trusted partners below:
Let’s explore some of the most strategic ways you can use a personal loan.
1. Paying down high-interest debt
Paying down high-interest debt to save money on interest payments is one of the best ways to leverage a personal loan. The most common forms of high-interest debt include payday loans, cash advances, and, especially, credit cards.
In 2023, credit cards charged an average APR of 22.8%. This was the highest level ever recorded, according to the Consumer Financial Protection Bureau. To avoid paying sky-high interest rates, you can use a lower-interest personal loan to pay off your existing credit card debt in full.
Here’s how it works…
Let’s say that you owe $5,000 on a credit card that’s charging you 20% interest annually.
- If you pay $200 per month then it will take you 2 years and 9 months to pay off the balance and you’ll pay $1,521.71 in total interest.
To avoid paying this interest, you can take out a personal loan that charges 10% interest and pay off your entire credit card balance. Then, you simply repay your personal loan over the same time period:
- If you pay $200 per month then it will take 2 years and 5 months to pay off the balance and you’ll pay $630.09 in interest.
In this scenario, you’d save $891.62 in interest payments by swapping the credit card’s 20% rate for the personal loan’s 10% rate.
2. Covering large expenses to avoid using a credit card
Paying for large purchases using a personal loan (instead of a credit card) can help save you money on interest while also ensuring that you have a clear repayment schedule.
Here are a few examples of large expenses that you may want to consider paying for with a personal loan:
In general, it’s still best to try and pay for these expenses in cash. But, some expenses – like medical bills or car maintenance – can catch you off guard. When this happens, a personal loan can help provide immediate cash.
3. Increasing your earning potential
You can also use a personal loan to help expand your education and learn new skills that will increase your earning potential. MoneyLion’s loan partners offer personal loans from $2,000 up to $100,000, which can help pay for a variety of costs associated with an undergraduate degree, graduate degree, or career advancement course like Coursera or edX.
Before taking out a loan, be sure that the skills you are learning will directly lead to an increase in earning potential.
4. Starting a side hustle or business
Obtaining a personal loan can also help you get a business venture off the ground. Normally, it’s best to apply for a business loan or credit card as these options are likely tax deductible. But, if you are unable to receive a business loan then a personal loan is another option to get the funding you need.
5. Building your credit
Obtaining a small personal loan and repaying it promptly can be a great way to help build your credit. Now, this doesn’t mean that you want to take on debt for the sole purpose of repaying it. But, if you’re planning to take out a personal loan anyway then staying on top of your repayment schedule is a simple way to help boost your credit score.
Final thoughts: Is a personal loan right for you?
While it’s usually best to pay for large purchases in cash, taking out a personal loan can provide you with instant capital when necessary. To get approved for a personal loan, you’ll need to apply with a lender and prove that you meet several benchmarks including:
- A reliable source of income
- Satisfactory credit
- At least 18-years-old
- Meet the lender’s debt-to-income ratio
Here are three steps to follow when applying for a personal loan:
- Shop around: Be sure to receive custom rates for personal loans including interest rates, fees, and terms. This way, you can compare offers from different lenders to find the best option.
- Only borrow what you need: While it’s usually best to avoid borrowing money whenever possible, personal loans can be valuable in a pinch. But, be sure to only borrow money that you need.
- Plan your repayment: Be sure to fully understand your repayment schedule before taking out a personal loan. Double-check that your expected monthly payments will fit into your budget.
We hope that you’ve found this article valuable when it comes to learning why personal loans could get cheaper in 2025 and how you can leverage this to your advantage.
Check out the rest of the MoneyLion blog to learn more about personal loans.
