Personal loan option growing in popularity

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 reports 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 is a faster increase than seen for auto, credit cards, mortgages and student loan borrowing.

The basics

A personal loan can be used for any purpose, but 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 because 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 they can look forward to.

The interest rate someone pays depends on several factors, including credit score, credit history, monthly cash flow and debt-to-income ratio.

The need

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 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 that is a reflection of the younger generation’s leeriness about credit card debt.

But looking at all age groups, they follow a seasonal theme too: Borrowing in December is more than twice as likely to be earmarked for medical procedures than during the rest of the year. Loan requests in August tended to be higher for moving and weddings, while those in February are nearly three times as likely to go toward taxes.

The use

Experian’s Public Education Director Rod Griffin said personal loans are best viewed as a shortterm loan for one-time use.

While good for big purchases, they can be a smart move if you are struggling to pay off multiple credit cards. But consider how you got into debt with credit cards in the first place and how to manage your budget.

You can get a personal loan through a bank, credit union or other lender. It pays to shop around and find the best terms. The lender must disclose the interest rate and all costs of repayment before you sign anything.