The growth of this type of debt is double the growth of credit card debt. But what type of debt is it?
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There are lots of ways to borrow money when you need spare cash. In recent years, however, consumers have increasingly been turning to one specific type of funding: personal loans.
Personal loan debt hit a total of $291 billion at the end of 2018, with a total of 36.8 million outstanding personal loan accounts. This aggregate balance was an 11.9% increase compared with a year prior -- which is double the increase in credit card debt, as the outstanding balance on cards went up just 5.9%. The total personal loan balance also grew faster than the auto loan balance, mortgage loan balance, and balance of student debt.
A total of $291 billion in personal loan debt is a lot of money, but this debt is spread around among a lot of borrowers. In fact, Experian reported that around 10.8% of all adults in the United States had a personal loan as of the fourth quarter of 2018.
Why are so many more people taking out personal loans?
Personal loans have become increasingly popular because more people know about them and they are easier to get than ever before. In fact, Experian explains that the rise in online lenders offering personal loan products has been a major contributing factor in increasing the number of Americans with personal loans.
With so many online lenders, it can be easier to comparison shop for the best personal loan and get approved for the desired funds. You don’t have to go into your local bank branch to fill out an application, but instead can shop among different lenders online to find out your rates and loan costs. You can also apply online and, with some personal loan lenders, could get your money in as little as a day.
Is the rise in personal loans a good thing?
A big increase in consumer debt is rarely a good thing because the more people owe, the more they pay in interest and the less money they have to do other things.
However, many people are using personal loans to actually help accomplish other financial goals. For example, personal loans are popular for debt consolidation. When you consolidate debt with a personal loan, you take out a loan and use it to pay off existing creditors. Often, people will pay off high-interest consumer debt, such as credit cards, payday loans, and medical loans.
If you can reduce your interest rate with a personal loan, debt repayment can become easier and more affordable. Personal loans also have fixed repayment timelines, so you may become debt free faster than if you’d just stuck with paying the minimum balance on credit cards. If you use a personal loan to borrow for a purchase you’d otherwise have put on a credit card -- and your rate is lower as a result -- this can also be a good thing.
So, ultimately, whether a personal loan is a good or bad financial decision comes down to each individual borrower. If a borrower gets a good rate, uses the loan funds to help become debt free, and is responsible about repayment, this can be a smart financial move.
Should you take out a personal loan?
If you’re thinking about joining the nearly 11% of Americans borrowing money through a personal loan, make sure you understand the loan terms, can afford the payments, and are using the loan proceeds to help improve your overall financial situation.
You should also borrow the minimum you need to accomplish your goals and should make sure to pay off the loan on schedule. If you do that, while you’ll be adding to the billions of dollars in aggregate personal loan debt Americans are accruing, the personal loan will hopefully be a wise financial choice for you.
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