Car loans. Student loans. Mortgages. Credit card debt. These are the kinds of debt that often get top billing in headlines and stories about those who have financially overextended themselves.
But there’s another kind of debt that’s growing, according to the latest consumer debt study from Experian, the consumer credit reporting company, and those are personal loans.
According to Experian, personal loans are the fastest-growing kind of loan debt. In the fourth quarter of 2018, existing personal loan debt totaled $291 billion, up 11.4% from the same quarter in 2017. That rate, according to the report, grew faster than auto loans, credit cards, mortgages and student loan debt.
What is a personal loan?
Personal loans can be secured or unsecured.
With a secured loan, the borrower uses a car, a home or other property as collateral. If they can’t pay back the loan, the creditor can take possession of the item pledged to recoup their money.
With an unsecured loan, the borrower promises nothing as collateral. Instead, they’re able to secure the loan based on their creditworthiness. It may be difficult to get an unsecured personal loan if your credit score is low.
When you sign a personal loan, you’ll be agreeing to make set payments until the debt is fully paid off. Paying off a personal loan is not like a credit card payment where you have the option of paying only the minimum. You must cover the personal loan bill in full each month.
Why do people use personal loans?
Personal loans are generally used to consolidate debt, start a home project, pay off medical bills and cover other large purchases, such as a wedding or a move. These loans once were considered a “last option” for people in debt, according to the Experian report.
But they’ve grown increasingly popular thanks, in part, to a surge in new online lenders and financial technologies that make it easier to secure a loan. More than 40 percent of all new personal loans come from several startups, according to Experian.
What’s more, the company says, Americans are more confident about their ability to pay off the loan because of a steady economy and low unemployment rates.
How much are people spending on personal loans?
Right now, nearly 11 percent of adults in the United States hold about 36.8 million outstanding personal loan accounts.
The average personal loan balance comes out to $15,143 with an average annual percentage rate of 9.37%. Monthly payments come out to $353 on average. Consumers in Washington had the highest average personal loan balance of $27,729. Hawaii came in the lowest at $12,638.
What are the pros and cons of a personal loan?
A personal loan can be a lifesaver for some at just the right moment when they need to pay off other debt or face an unexpected home repair or expense.
These loans, however, should be used cautiously. Some personal loans, especially unsecured ones, can have high interest rates and cost you more money in the long run. So, it may be a better idea to save up for that fancy vacation and take it in a couple of years instead of using a loan to cover the expense.
Should you get a personal loan?
Experian has three tips for those considering a personal loan.
Know how they work: Be sure to read all the fine print to ensure you can meet your obligations, including sending in your payments on time and in full. If you can’t live up to your end of the loan agreement, the creditor could take you to court.
Get your credit score: If you’re seeking an unsecured loan, you’ll have a better chance of getting it if your credit score is high. You’ll want to know your own score before you start the process.
Understand the requirements: Whenever you make a financial decision, it’s critical that you know all the terms. For a personal loan, that includes the interest rate and how long it will take to pay the loan off in full.
We’ll add in a fourth tip: Make sure you really need to borrow this money. Before you sign any loan, ensure that your budget allows you to make your monthly payment and take a hard look at your own finances to determine if the loan is even necessary.
If you are experiencing financial difficulty and are looking for a solution, non-profit credit counseling can help you make sense of all your options. Contact us today for a free financial assessment with one of our certified credit counselors.
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