The number of people relying on personal loans in the US jumped to a record high in the second quarter of 2022. Americans owed a whopping $177.9 billion in unsecured personal loan debts, taking the average balance to $9,896 per loan. Do these figures look troubling? You may believe the effects of the pandemic or surging inflation levels are to blame for such a high figure of personal loans. However, this is not the case. Delinquency rates (people defaulting on repayments) have actually been on a decline. In fact, the 60-day delinquency rate on personal loans is merely 3.25%, slightly below the pre-pandemic levels.
While mortgages comprise the lion’s share of American debt, personal loans account for 4.1% of non-housing debt. Here’s a look at why personal loans have gained popularity.
#1 – No Collateral Requirement
To be eligible for a secured loan, you need to furnish some collateral, like your home, car or any other asset, to the lender for loan approval. Personal loans are unsecured, which means no collateral is required. If you’re unable to repay the loan, there are severe consequences in terms of your creditworthiness and ability to be eligible for loans in the future. However, unlike secured loans, you will not lose a home or an asset on non-repayment.
#2 – Lower Interest Rates
Personal loans typically come with lower interest rates than credit cards. Those with an excellent or very good credit score can qualify for personal loans with more attractive interest rates and a higher loan amount. Credit scores generally range from 300 to 850. Scores greater than 800 are considered excellent, while scores between 740 and 799 are considered very good.
#3 – Flexibility of Use
When you qualify for a student loan, you can use the funds only to cover education-related expenses. Similarly, when you get a home loan or an auto loan, you can use it only to buy the preselected house or car. A personal loan gives you the flexibility to use the funds for a range of purposes, from paying medical bills and home improvement. It can also cover for unexpected expenses. If you have a major purchase and don’t wish to lock up your funds, personal loans are a good option. You can even use personal loans to pay for your education and improve your career prospects.
#4 – Personal Loans for Debt Consolidation
Did you know many people take a personal loan to manage their debt? This may seem counterproductive but is considered a prudent way to prevent debt from damaging your financial and mental health. You can use a personal loan for debt consolidation, which involves paying off all your old debts. This is known as debt consolidation, which allows you to focus only on one loan and one monthly payment. It is far easier to manage than multiple loans.
Moreover, personal loans come with much lower interest rates and can be used to pay off loans with higher interest rates. So, by using a personal loan for debt consolidation, you can effectively reduce your total interest payment and EMI amount. Before doing so, it’s a good idea to consider all expenses involved, including the interest rates on your current loans, refinancing costs, and early payment fees.
Image Source: https://www.forbes.com/advisor/personal-loans/personal-loan-debt-statistics-during-the-pandemic/
#5 – Long Repayment Tenure
While payday loans are easy to qualify for and are known for their quick disbursals, they are short-term loans. They will typically need to be repaid within 30 days or even less than that. Moreover, they come with a fairly high interest rate. Credit card bills also need to be settled within a month. If you need funds for extended liquidity, personal loans are the perfect option. The tenure of personal loans can range from two to ten years. The longer the tenure, the lower the EMIs, making it easier to plan your finances and make timely repayments.
#6 – Help Build Your Credit Score
Personal loans can help improve your credit score. You can use it to build your credit history by ensuring you make your monthly payments on time, which establishes a track record of responsibility. Taking a personal loan with a longer tenure and repaying on time strengthens your credit profile.
If you need extra cash to pay for your education, finance a wedding, make a major purchase, get some home improvements done, or consolidate high-interest debt, a personal loan can come in handy.