Is a personal loan right for you?
Customers seek credit for variety of reasons, a big purchase at top of the list
Personal loans have surged in popularity, in part because of increasing consumer confidence and a growing array of online lenders to provide them.
Credit reporting agency Experian says that personal loans were the fastest-growing type of consumer debt in the past year. According to Experian, existing personal loan debt hit $273 million in the second quarter, up 11 percent from the same quarter last year. While personal loans remain a small part of overall consumer debt, that’s a faster increase than seen for auto, credit cards, mortgages and student loan borrowing.
The Basics
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A personal loan can be used for any purpose, although they are often used to consolidate debt or make a major one-time purchase.
The money is provided in a lump sum and repaid over a fixed period of time — typically a few years — with equal monthly payments.
Consumers like personal loans be-
cause they provide an easy solution when they need a large sum of cash, such as to pay for braces or a new roof. And for those people trying to dig out from under credit card or other revolving debt, the loan establishes an easy means to budget with lower interest rates than credit cards, and with a finish line for repayment.
The exact interest rate someone pays depends on several factors, including credit score, credit history, monthly cash f low and debt-to-income ratio.
The need
Consumers are using personal loans for a variety of big purchases.
Lending Point, an online provider of personal loans, found that its customers use loans for different needs based on their age and the time of year. Younger people, for example, tend to use loans to pay for weddings and moving expenses, while older borrowers tend to use the money for medical expenses and home improvement. Chief Marketing Officer Mark Lorimer said this reflects the younger generation’s leeriness about credit card debt.
The use
So what is the right way to use the loan? Experian’s Public Education Director Rod Griffin said personal loans are best viewed as a short-term loan for one-time use. While good for big purchases, they can also be a smart move if you are struggling to pay off multiple credit cards. However, consider how you got into debt with credit cards in the first place and how to manage your budget moving forward. You don’t want to take out the loan and run up your cards again.