Data from TransUnion shows that personal loans are the fastest growing debt in the past year or so. The data goes on to show that outstanding personal loans had an 11.4% increase in the second quarter when compared to the same period in 2017 to get to an astounding $273 million. This brings the total outstanding personal loans to a whopping $120 billion and counting.
So, what is it that is fueling the growth in this industry so much? Is it that people now have better credit? Are there more problems or is it that there are just way too many lenders willing to overlook all those rigid parameters of which typical banks just won’t let go?
What is a Personal Loan?
A personal loan is a form of an unsecured loan that typically ranges from $1,000 to about $100,000 depending on your needs and the lender you use. Different lenders offer these loans at different rates. Some may give it to you at a fixed rate while others will offer variable rates.
Unsecured means that you are not required to put anything up as collateral, and as such, personal loans tend to be riskier than your typical secured loans. Which means that they often come with much higher interest rates and stricter terms of repayment.
People often take up personal loans for various short-term reasons such as:
- Making ends meet in the case of Payday loans
- Medical bill emergencies
- Home improvements
- Credit card bill consolidation
This is the kind of money you borrow to make large purchases that are not quite at the level of buying a house or a car but are well above what your paycheck can cover at that very moment. These kinds of loans are often disbursed in very little time; it can be a matter of hours when dealing with some online lenders.
Why are Personal Loans so Popular Now?
There are several reasons why personal loans are so popular today. Some of those reasons include:
- The ease with which you can get them: unlike most other loans, unsecured personal loans are typically easier to apply for and get. For the most part, all you need is proof of income, citizenship, and Some lenders don’t even care for your credit score although many will use it to determine the interest rate that you will pay. The riskier you are to them the higher your interest rates will be.
- Online lenders: the growth of digital banking and online lending has made it easier for people who would typically be locked out by traditional banks to get access to quick loans. As things stand today, according to the same data from TransUnion, online lenders account for about 36% of all personal loans.
- Technology: although personal loans are not exactly a new concept, technology has made much more accessible to more people. Today, all you would need to do to get a personal loan is to go online and fill out an application. You will have your money in a matter of days when dealing with banks and a matter of hours when dealing with some online lenders.
- Accessibility: there is something to be said about people taking up available opportunities. Even if you did not exactly need the money, the fact that some online lender promises you $1,000 within a matter of hours and claim they do not even care about your credit score (almost everyone qualifies) will make you seriously consider taking them up on their offer.
Most people happen to take up personal loans because they are accessible. In the past, you had to walk into a bank and talk to a guy who may or may not approve your request for a personal loan. Today, you don’t even have to speak to another human being. It is all done via the internet.
How Personal Loans Can Help
Apart from the fact that personal loans can help put money in your pocket quickly, they can be used for a variety of things. Some of which could help make your financial health better.
One of the most common uses for personal loans is credit card debt consolidation. Since personal loans typically come at a much lower interest rate than your everyday credit card, you could consolidate all of your credit card debt under the new personal loan and pay the lower interest instead.
Say for example you have about $20,000 in credit card debt at an interest rate of 16%. Depending on your credit rating and a host of other factors, you can get a personal loan of $25,000 at a lower interest rate of say 8%. Doing so allows you to pay off your credit card debt in its entirety thus leaving you with a personal loan that goes at a much lower interest rate thus saving you some money in the long run.
You could also use personal loans for other things such home remodel, temporary business funding as well as to make ends meet when your paycheck just can’t cut it.
What You Need to Consider When Applying for a Personal Loan
There are several critical factors that you need to consider when applying for a personal loan with whichever lender you choose:
- The terms and conditions of the loan repayment
- The interest rates involved
- The reputation of the lender
These factors can determine whether or not you will have an easy time dealing with your lender or whether you are simply dealing with a loan shark who doesn’t follow any rules.
As popular as they are, it must be stated that personal loans come with a considerable amount of risk. Some lenders do not really adhere to the strict guidelines put forth by the SEC and may employ unscrupulous tactics especially when it comes to money recovery should you default.
Additionally, most lenders take advantage of the fact that many personal loan borrowers are desperate and would go for any terms and conditions set forth by the lender. This makes it a seller’s market which is never a great situation for buyers.
That being said, the growth of personal loans has made life so much easier for millions of people who can now access the cash they need without too much fuss. If you’re considering a personal loan, then check your free credit score with credit.com to see what shape your credit is in before applying.