You have been thinking of renovating your home to sell it at a better value. As you explore personal loans, the interest rates may shock you. Rising interest rates affect the total amount you pay on the loan, including the monthly payments. Aspects like credit score, income, affordability, loan type, loan provider and economic conditions decide the interest rates.
Even a slight variation in the interest rate may affect your financial base. For example, a low rate of interest (between 5%-8%) may mean significant savings. Alternatively, the borrowing may get costly. The blog discusses the impact of interest rates on personal loans. It will help you understand the ideal time to look for a loan. Alternatively, you may check the ways to fetch an affordable quote given the high interest conundrum.
How does Bank of England’s base rate affect interest rates?
The Bank of England’s current base rate is 4.25%. The base rate influences the interest rates that loan providers charge for personal loans. The rate may rise and fall, aligning with the base rate. The Bank of England changes the base rate as a means of regulating the economy.
Lower rates encourage customers to spend more. It means more money in the economy. Hence, it leads to the phenomenon of inflation. It means the cost of living and utilities increase. The Bank of England adjusts the Base rate at least 8 times a year.
What happened to Personal loan rates in the first half of 2025?
Personal loan interest rates have been increasing steadily since January 2025 to June 2025. The average interest rates on personal loans currently are 5.8%-6.0%. It is the reason many loan providers offer loans with APR ranging from 6.1%to9.9%. The rate you get depends on the financial management, credit scores, income, etc. Some loan providers reserve the most affordable rates for individuals with good credit scores.
One must compare the APR, interest rates and total amount if seeking personal loans for bad credit scores. It will help reduce the liabilities to an extent. Also, applying for a lower amount, providing a guarantor, or improving income may help fetch reduced interest rates despite low credit history. It is about proving your affordability and credibility in making the timely loan payments.
What does high interest on personal loans mean for individual finances?
One generally borrows a sum for a specific individual need and repays it over an agreed time. It is also known as the loan repayment term that one gets during the personal loan approval. One generally pays a fixed amount throughout the loan term on a fixed loan term agreement. In a variable rate loan, the repayments may increase or decrease according to the change in the economy and interest rates.
Here, if the interest rates rise, the monthly repayments rise too. It may mean adjusting your budget and paying more towards the loan. The good part is- it grants the opportunity to clear your loan quickly than the previous agreement. However, it also acts as an additional burden on the finances. Here are other ways high interest rates on personal loans affect lifestyle goals and other bills:
1) Increases Total cost of borrowing
As mentioned above, high interest rates increase the monthly payments and the total amount to pay on the loan. It eventually makes the loan more expensive. Moreover, if you struggle to pay, you may increase the loan repayment term to pay comfortably. It may potentially decrease the monthly instalments. However, the interest costs continue to rise.
2) Affects the loan affordability
You get an instalment loan at the interest rate of 7.8% p.a. However, the interest rates rose to 9.7% on the same loan. It eventually means increased interest payments, monthly instalment amount and total pay. Thus, you may have qualified for the initial agreement given the finances. However, the changed interest and costs affect the affordability.
High monthly instalments may strain your budget. It leaves you with a minimal amount to grow up savings and investments. In the worst cases, it may affect the ability to repay the loan timely. Here, you can discuss the potential solutions with the creditor.
Here is how your new car loan may look with changed interest rates:
| Parameters | Instalment loan at interest rates (7.8%) | Instalment loan at interest rates (9.7%) |
| Loan amount | £25000 | £25000 |
| Monthly instalment | £504.52 | £527.49 |
| Total interest amount | £5271.22 | £6649.60 |
| Total loan payment amount | £30,271.22 | £31,649.60 |
| Loan term | 60 months (5 years) | 60 months (5 years) |
| Origination fee | £1250 | £1250 |
| APR | 9.88% | 11.82% |
So, you can clearly see the difference in how high interest rates on personal loans affect the overall cost of a loan. Here, you can see the increment in monthly payment, APR, total interest and amount repayable.
3) Difficulty in prepayments
Individuals with variable-rate personal loans may have to rethink the option of pre-paying the amount. It is because once you pay a higher amount, and interest increases, it would be null and void. Moreover, dedicating such a huge sum towards the loan may affect the potential to achieve other goals. What if you miss tax payments just to overpay the loan?
It would not be an ideal situation for you. However, if you lack enough funds to support tax payments, check poor credit loans with no guarantor requirement. It is one way to pay the dues timely without incurring penalties. You may get the loan without a guarantor if you hold a recurring income. The loan would not be a trouble if you borrow only a small amount and repay in the shortest possible time.
Alternatively, if you can manage, prepayment may prove highly influential here. It helps you save whopping money on interest rates. However, it may come with additional charges, which may again make it a futile option.
4) No refinancing possibilities
One usually considers refinancing, especially when the interest rates fall. It helps one fetch affordable interest rates and reduced monthly payments. Eventually, it promotes huge savings. However, in increased interest rates, you don't see any hope of refinancing. You will have to wait for the economy to improve and interest rates to fall to benefit from the opportunity.
Bottom line
So, you can see that rising interest rates on personal loans affect nearly every arena of lifestyle. It delays your goals' achievement timeline, limits savings, and puts you in a tight financial crisis. However, you can gear up and battle the situation by discussing it with the loan provider. Check whether you can overpay without attracting penalties. Alternatively, reduce expenses towards less important things to save money for personal loan payments.
