Consumers owe less for personal loans than for credit card debt, but they’re piling up debt on personal loans at a much faster rate.
In an analysis of borrowing trends from 2009 to 2019, LendingTree found that nearly 20 million consumers borrowed about $160 billion using personal loans, a tool that gained popularity following the financial crisis.
Like a credit card, a personal loan is an unsecured debt and, because of that, has a fairly high interest rate. But rates can be a good bit lower than on credit cards.
The number of people taking out personal loans rose an average of 8.7 percent from 2009 to 2019 but grew much faster in the latter part of the decade. For example, the rate increased by nearly 22 percent from 2013 through 2019.
The LendingTree analysis shows that about two-thirds of borrowers use personal loans to refinance or consolidate existing debt, such as credit cards. People with prime credit scores tend to make the most use of personal loans. Subprime borrowers generally get less favorable terms and pay a higher interest rate.
Bankrate’s summary of personal loan interest rates for February shows a low of 5.95 percent with LightStream to a high of 18 percent at OneMain Financial.
These loans have grown in popularity because the application process is fairly easy and the rates are less than credit cards. However, your actual interest rate will hinge on multiple factors, such as your credit score, annual income, and how much debt you already have.
ConsumerAffairs rates the best personal loan companies for different credit scores here.
There may be better alternatives, especially if the purpose of a personal loan is to pay off existing credit card debt. Applying for a balance transfer card that offers 0 percent interest for an introductory period of 12 months or longer might be a better way to go.
It’s worth mentioning that a survey by CompareCards found that most consumers don’t really understand how a balance transfer card works.
The researchers found that 75 percent of the consumers surveyed mistakenly believed that they would be assessed interest on the full balance if they didn’t pay it off completely during the transfer card’s introductory period. That’s not the case -- although that’s exactly what happens with a merchant’s “deferred interest” plan, so the confusion is understandable.
A balance transfer card can give you a year of interest-free payments on your credit card bill. Once the introductory period is up and you’ve made a big dent in your balance, a personal loan can be used to pay off the rest of the balance.
In searching for a balance transfer card, consider one that doesn’t impose a one-time balance transfer fee. Most balance transfer cards charge a fee of at least 3 percent. On a $5,000 balance, that comes to $150.
ConsumerAffairs has checked out some of the best balance transfer cards here.