How the Federal Reserve shapes consumer loan rates

As the central bank of the U.S., the Federal Reserve, also known as the Fed, holds major sway over the cost of borrowing money. Although it doesn’t directly set the interest rates on consumer loans, its adjustment of the federal funds rate — the rate banks charge each other for overnight lending — influences interest rates on loans across the economy. When the Fed increases or decreases the federal funds rate, you’ll typically see the interest rates on personal, auto, and private student loans follow suit.

By tracking the Fed’s moves, you can get a better sense of whether taking out a loan will be more expensive or more affordable. It may even help you time your borrowing decisions so you can secure the best possible rate.

The Federal Reserve sets a target range for the federal funds rate, a benchmark rate that determines how much lenders charge one another for overnight lending. When the Fed increases this rate, lenders generally pass along the higher costs to consumers by raising interest rates on consumer loans and credit cards. When the Fed decreases this rate, lenders may lower the interest rates on their loans as well.

Between February 2022 and August 2023, for example, the Fed increased the federal funds rate from 0.08% to 5.33% in an effort to combat inflation. Rates on loans increased along with it and remain high today, despite a few Fed rate cuts in 2024. The Fed held rates steady at its most recent meeting in July 2025, but economists predict that rates could come down once or twice by the end of the year.

Learn more: Mortgage rate predictions for the next 5 years

The federal funds rate can also influence the prime rate, which is what banks use as a starting point when setting consumer loan rates. Banks typically set the prime rate about three percentage points above the federal funds rate. They may offer this prime rate to the most creditworthy customers and charge higher rates to borrowers with a weaker credit profile.

Personal loan rates are on the high side after the Fed increased its rate multiple times over the past few years. Although it cut the federal funds rate a few times in 2024, average personal loan rates only came down slightly, from a high of 12.49% in February 2024 to 11.57% today (on two-year loans).

Most personal loan rates are fixed, so if you already borrowed one, your rate won’t change. A fixed rate stays the same over the life of the loan. But if you’re looking to take out a new personal loan, your rate may be higher than it would have been a few years ago.

The good news is that some lenders offer rates starting around 6% or 7%, and most don’t go above 36%. These rates are much more affordable than a payday loan, which can come with an APR of 390% or higher.

The Fed doesn’t have much of an impact on federal student loan rates, but it can influence private student loan rates. The rates on federal student loans are set by Congress each year and are partly based on the 10-year Treasury note auction, which the U.S. Treasury holds every spring.

Federal student loan interest rates are always fixed, so they stay the same over the life of the loan. They were particularly low in the 2020-21 school year, when Direct Subsidized and Unsubsidized Loans for undergraduates carried an interest rate of just 2.75%. They’re much higher today, with a rate of 6.39% for the 2025-26 academic year.

The interest rates on private student loans are influenced by the federal funds rate, and lenders may increase or decrease their rates to keep up with the changes. If you already have a private loan with a variable rate, you could see your rate fluctuate with market changes.

A variable interest rate could also cause your monthly payments to go up and down. If you’re a new borrower and want predictable monthly payments, consider a fixed-rate private student loan. If you’ve already borrowed, you might consider refinancing your student loan to a fixed rate, especially if you can qualify for a better rate than you currently have.

Learn more: How the Fed affects student loan interest rates

The rates on car loans can also be influenced by the Federal Reserve. When the federal funds rate is high, auto loan rates will likely be high as well.

According to Edmunds, the average rate on a new car loan was 7% in August 2025. For used cars, it was 10.7%. These rates haven’t changed much from a year ago, when they were at near-record highs.

The federal funds rate isn’t the only factor influencing car loan rates, though. Your rate depends on a variety of factors, including your credit score, the type of vehicle you’re purchasing, and whether you’re getting a new or used car.

Learn more: How to buy a car without a co-signer

While the Federal Reserve’s decisions around interest rates are outside your control, there are ways you can boost your chances of securing a decent rate on a loan. Here are a few ways you can qualify for a competitive rate.

Your credit score plays a major role in the rate you get when you take out a personal loan, auto loan, or private student loan. A high credit score can help you access the best rates, while a low credit score means you could get stuck with higher rates and fees.

Consider ways you can improve your score before you apply for a loan, such as making on-time payments on your debts, avoiding too many hard credit inquiries, and paying down credit card balances to decrease your credit utilization.

These steps could be well worth the effort if they score you a better interest rate on a consumer loan.

Your credit score isn’t the only part of your finances that lenders consider when you apply for a loan. They’re also concerned with your income, employment, and debt-to-income ratio (DTI). Having a reliable income and a history of stable employment can help you access a better interest rate.

You could also reduce your debt-to-income ratio — that’s your monthly debt payments compared to your income — by paying down existing loans or increasing your income. Lenders generally prefer a DTI at or below 35%, though it can vary depending on the loan type.

Private lenders set their own rates, so shop around with multiple loan providers to find your best offer. You can often prequalify for loans online, which is a quick process that lets you check your potential rates without harming your credit. Checking your rates with several lenders could help you save money in the long run.

Lenders may offer lower interest rates on short-term loans and higher rates on long-term loans. This helps them offset the risk of a long repayment term. If you can swing a shorter repayment term, you might benefit from a lower rate. But make sure you can afford the monthly payments, as this strategy wouldn’t be worth the risk of defaulting on your loan.

Although you can’t control the federal funds rate, you could be strategic about when you apply for a loan. If the Federal Reserve cuts rates, that could be a good time to borrow.

If it seems like rate increases are on the horizon, you may want to lock in a fixed rate before that happens. And if you have a variable rate that keeps going up, you could consider refinancing your debt for a fixed-rate loan.

If you don’t have to pay a fee to refinance, as is usually the case with student loans and personal loans, you could refinance multiple times to take advantage of decreasing interest rates and maximize your savings.