The rise in personal loan debt has financial experts worried. According to a recent study from Equifax, personal loans are up 10 percent from the previous year. In fact, all three major credit agencies report a double-digit increase in the use of personal loans over the past few months.
More often than before personal loans are being utilized by consumers looking to pay for unexpected or needed expenses. In fact, personal loan debt was reported as being the fastest growing category of consumer debt.
At a time when the economy is stable and incomes are increasing for American workers, there are many questions as to why consumers are resorting to personal loans. This category of debt is unsecured, meaning no asset has been listed as collateral for the debt that would otherwise secure it in the event the debtor cannot pay. Due to this fact, personal loans come with higher interest rates to balance the extra risk factor that goes along with personal lending.
Experian reports that the average personal loan balance is $16,259. The number of personal loans over $30,000 has increased by 15 percent over the course of the past five years. One reason for this growth in lending could be the rise of apps and online platforms that make getting personal loans an easier process than in the past. Companies, like FinTech, that offer these services now make up 40 percent of all personal loan balances. In 2013, they only made up five percent of these loans.
Due to the ease of applying for and taking out these loans, TransUnion reports that over 20 million American consumers have some type of unsecured debt. As of October 2019, the total outstanding personal loan debt was $115 million, which is still smaller than the total amount of outstanding car loan debt and credit card debt.
One reason for the increase of personal lending has been attributed to the similar increase of online lenders and other financial technology that makes it easier for someone to get these type loans. These loans require only a signature as a promise to pay. High interest personal loans are oftentimes a last resort for borrowers who are in financial trouble and lenders know it. The terms and conditions are not favorable to the borrower. If the borrower wishes to pay off the loan early, there are often exit fees and penalties that come as a result.
Traditionally, personal loan debt has always been used as a marker for determining the direction in which the economy will go. So long as American consumers can spend but still pay off their debt, economists do not worry. It is when consumers take out loan obligations with no real likelihood of paying back the debt that experts begin to worry.
Personal loans are normally taken out by someone who is said to have “near prime” credit, with scores between 620 and 690. These credit scores indicate that the consumer has had trouble making payments on debt in the past. A consumer will take out a personal loan for a variety of reasons. Many seek these loans to pay off credit cards or medical debt and choose the loan as a way of making only one monthly payment instead of multiple payments on various debts. A personal loan forces that person to pay off the debt over a fixed period, which normally ends up being three to five years. Problems arise, however, when the consumer continues to use his or her credit card even after paying off the balance with a personal loan. Before that person knows it, he or she may end up with even more debt and an amount that is unmanageable.
The good news is that even though more Americans are taking out personal loans, they are still able to pay back the debt. The delinquency rate for personal loans is still at a low rate of 4.5 percent. However, if unemployment creeps up or the cost of living is not matched by increasing incomes, this figure could quickly change.
If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.
Source: The Washington Post – Personal loans are ‘growing like a weed,’ a potential warning sign for the U.S. economy.