Personal Loan Debt Growing By 11% Annually And Is Outpacing Student Loan And Credit Card Debt
Personal loan debt is the fastest-growing debt category in the country. It is outpacing student loans or credit cards by double digits.
Personal loan debt now exceeds $300 billion. Credit reporting agency Experian states this is an 11% yearly increase.
Personal loans can help consolidate credit card debt or make funds available for major projects like home remodeling effort. However, personal loans do differ in some key ways from other types of credit you might use.
The Pros And Cons Of Taking On Personal Loan Debt
Research by ValuePenguin states that unlike credit cards, interest rates can vary much more dramatically. In fact, some borrowers with excellent credit may qualify for loans with interest rates as low as 5% or 6%. On the other hand, borrowers with poor credit may encounter rates higher than the average credit card, sometimes exceeding 30%.
This wide range of interest rates makes personal loans more affordable for those with better credit. They may also make sense for borrowers with excellent credit who pay off their debt in a timely manner. However, borrowers with poor or fair credit may face interest rates higher than what they’d otherwise qualify for with a credit card.
Borrowers with poor to fair credit could face higher interest rates and monthly payments. Thus, putting them deeper in debt. Consolidating payments using a personal loan wouldn’t make sense in this scenario. Consider credit counseling options, or try to negotiate a lower interest rate with your credit card servicer.
Shorter Repayment Schedule And Origination Fees
Most personal loans are serviced on a three-to-five-year repayment schedule. This means your minimum monthly payment will be higher than with a credit card. Of course, paying the minimums on a card is never a good idea. But the option does exist for those times when it’s needed.
Also, personal loans often also charge origination fees which can add to your repayment burden, and may reduce the total amount of cash at your disposal from the loan.
Plus, to qualify for some loans if you don’t have great credit, you’ll likely need collateral for a secured loan. That means you put your collateral in peril if you can’t make the payments.
Perks And Benefits Of A Personal Loan
Unlike credit cards, personal loans less frequently offer perks or rewards like cash back or airline miles. You’ll forego those rewards by consolidating the debt onto a personal loan. Chances are that if you qualify for a consolidated personal loan with rates lower than your credit card, your credit is likely good in the first place.
For borrowers with good to excellent credit, personal loans can add to your credit mix, and reduce the interest you pay for large home-improvement projects or other major expenses. For those with less-than-perfect credit, however, consider whether factors like interest rates, origination fees, and lack of perks, and whether a personal loan will result in significant savings.