Personal loans are the fastest-growing type of consumer debt in the past year, according to data from Experian. Existing personal loan debt hit $273 million in the second quarter, an 11.4% increase vs. the same quarter in 2017. That percentage growth is bigger than auto, credit cards, mortgages, and student loan debt.
A personal loan is as another form of credit you can use to make a big purchase or consolidate your debts. Personal loans usually come with lower interest rates than credit cards, so they often can be used to consolidate multiple debts into a single, affordable monthly payment.
While the total personal loan debt is much smaller than other consumer categories, personal loan originations have grown steadily for the last five years. (If you feel a personal loan is right for you, check out Experian CreditMatch.)
Credit Cards and Personal Loan Debt
Personal loan debt mirrors a similar path of credit card debt over the last few years. This could be because more Americans are feeling confident about the economy amid historically low unemployment rates.
Another reason for the increase in personal loan debt is the rise of online lenders, known as fintech. Startups such as SoFi, Marcus, Prosper, Best Egg, Avant, and Upstart have contributed to the growth of personal loans and now account for more than 30% of all new personal loans.
Their market share will likely continue to grow as a U.S. bank regulator recently announced fintech companies, if approved, will be allowed to operate independently across the country under a single federal license.
How a Personal Loan Works
When applying for a loan you are asked what amount of money you want to borrow from a lender such as a bank, credit union or online lender. Once approved, the money from a personal loan can be used for anything you choose, be it paying off credit card debt, medical expenses, consolidating other debts, or buying a new appliance. To pay back a personal loan, you make the same payment amount over the set amount of time until the loan is completely paid off.
3 Things to Consider With a Personal Loan
If you are deciding to apply for a personal loan, be careful when considering which one is right for you. Finding the best offer can help you avoid affecting your credit score. Here are some common things to consider when choosing the right personal loan:
- Know before you apply: Do you know what your credit score is and have you checked your credit report recently? Before you apply for a personal loan you want to make sure that you know your credit history.
- Understand the difference between a personal vs. debt consolidation loan: A personal loan with a lower interest rate to pay off the balance of a credit card can be a good option. However, if you have a few different debts to pay off, you may consider looking into a debt consolidation loan as an alternative. Understanding which one best matches what you need is important.
- The terms of the loan: Make sure the terms of the loan make sense for your credit profile. To do that, check the interest rates and the length of the loan in order to find a monthly payment amount that is right for your budget. Lower interest rates are great but can also make for a longer repayment term.
Can You Get a Personal Loan with Bad Credit?
Yes, you can get a personal loan with bad credit but the odds may seem stacked against you. Your best bet is to check with a local bank or credit union or find an online lender to see if they offer a personal loan that is meant for people with bad credit. You should also know what your credit score is so you aren't just assuming you have bad credit. Many people don't know their score even though they can get their credit score for free.
As personal loan debt has increased over the past year, so has the delinquency rate among people struggling to pay back their loan on time. Experian data shows that all but six states saw their late payment rates increase over the past year. Before you take out a personal loan, make sure the payment required is one that you can afford so you don't impact your credit score after paying late.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer, or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.