The explosion of personal loans is a worrying sign

We all know that US debt levels continue to reach tragic levels year after year. According to a recent study by The Balance, the average US household credit card debt stood at $8,398 per household in June 2019. Student loan debt levels have become a $1.5 trillion crisis , and we borrow far too much to finance new cars that depreciate at a rapid rate. In fact, the average new car loan was $32,187 in the first quarter of 2019, and no one seems to care.

Unsurprisingly, the use of personal loans is also on the rise, as evidenced by a 2019 survey from credit reporting agency Experian. Personal loans are currently the fastest growing type of consumer debt, they note, showing an 11.9% increase between the fourth quarter of 2017 and the fourth quarter of 2018.

The average personal loan balance is also shockingly high – currently at $15,143 with an average monthly payment of $353. The average APR on these loans is around 9.37% according to data from Experian, which isn’t the worst rate you can get, but not that good either.

In the last quarter of 2018, 6.1 million personal loans were issued and 34.3 million consumers had a personal loan. In total, these consumers owe about $291 billion.

The rise of personal loans

Considering that personal loans used to be a more obscure borrowing option, this all seems somewhat odd. Why are so many consumers taking out personal loans these days? And perhaps more importantly, what do they do with all that money?

Experian has some insights into why personal loans are on the rise, and their suggestions make sense.

On the one hand, Americans “feel confident about a stable economy amid historically low unemployment,” they note. Additionally, personal loans have become mainstream thanks to an increase in the number of online lenders who have heavily marketed their products as a cheaper alternative to credit cards.

“Several startups contributed to the growth and now account for more than 40% of all new personal loan originations, according to data from Experian,” they note.

The rise in personal loans can also be attributed to the fact that many online lenders are cleverly marketing them as tools to escape the high interest rates charged by credit cards. After all, the average credit card interest rate is currently over 17%, just under half the average personal loan APR. Personal loans also come with fixed interest rates and a fixed monthly payment that will never change, making them a much more consistent and predictable option for consumers who want to create a foolproof plan to pay off their debts over time. time.

Of course, debt consolidation isn’t the only way consumers use personal loans to their advantage. People also use fixed rate personal loans to pay for big home improvement projects, finance a major purchase like furniture or a new carpet, or even pay for college tuition. Since personal loans are unsecured, you can use the funds however you want – and that’s exactly what people do.

The problem with personal loans

And therein lies one of the main problems with personal loans – they are unsecured. Where a car loan is secured by a car that has a certain value and your home loan is secured by property you own, personal loans are not secured by collateral. That means consumers tempted by low rates and monthly payments may end up spending their loan funds on a vacation to the Bahamas or a luxury shopping spree.

And, even if you’re considering using a personal loan to consolidate and pay off your debt, the loan itself may create more problems than it solves. Switching high-interest credit card debt to a personal loan won’t prevent you from racking up new balances on your credit cards — only you can do that.

The reality is that much like 0% balance transfer credit cards that allow consumers to consolidate debt interest-free for a limited time, personal loans often encourage more spending because they free up lines of credit that can be hard to ignore if you have a spending problem anyway. .

Another problem with personal loans is both an advantage and a downside. Thanks to modern technology offered by lenders and platforms like Marcus from Goldman Sachs, LendingTree and LightStream, applying for a personal loan is a breeze.

You can complete a complete loan application online from the comfort of your own home, get your loan approved in minutes, and see your funds transferred to your bank account within business days (and sometimes sooner). Considering that most personal lenders allow you to borrow up to $35,000 and some offer loans of up to $100,000, it’s not hard to see how downright dangerous this convenience can be.

Before taking out a personal loan, read this

As the holidays draw closer every day, online lenders are already trying to entice unsuspecting borrowers into taking out a personal loan to cover holiday gifts, year-end travel, and more. LendingTree has an entire page on their website devoted to “holiday loans,” for heaven’s sake.

“Need extra money for the holidays? they ask, noting that “a holiday loan can help bridge the gap between your gift list and your bank balance.”

First Financial Credit Union advises you to “enjoy the season more when you reduce stress” on their holiday loan page, to suggest you take out a personal loan with an APR of 9.990%.

I’m not going after those companies specifically, and there are plenty of others out there already spending money advertising the holidays. But I a m say you should think long and hard before borrowing for holidays or for any other reason.

Whatever your reason for wanting to take out a personal loan, it is essential to remember that you are always borrowing money. The monthly payment and APR may be affordable, but you’re still fine with making monthly payments for years. Is an updated bathroom, a Caribbean cruise or a new flat-screen TV for your bedroom worth that kind of commitment? Only you can decide, but I guess that’s probably not the case.

Can personal loans really help you get out of debt? In the end, their usefulness depends solely on your degree of self-discipline.

It may be a good idea to take out a personal loan to consolidate debt at a lower interest rate, but only if you’re going stop using credit cards. If you plan to continue using credit and will likely max out your balances again, a personal loan could easily leave you with more debt in the end — and worse than when you started.

The bottom line: Banks and online lenders are once again after your hard-earned cash, but personal loans aren’t always the useful tools they’re supposed to be. Before you get caught up in the hype, make sure you’re borrowing for the right reasons.

About Judith J. George

Check Also

The Lighthouse: Sask. the director of the shelter used funds for personal loans

An independent investigation found an “overarching culture” of mixing personal financial interests with those of …