Americans certainly aren’t strangers to debt. Many are saddled with student loans and have high credit card balances. And let’s not forget mortgage debt — an oft-necessary component of owning a home.
But actually, the fastest-growing debt category in the U.S. these days is personal loans, reports Experian. Personal loan balances reached $305 billion in the second quarter of 2019, and the average borrower with one of these loans has a balance of $16,259.
But is a personal loan right for you?
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How personal loans work
A personal loan is a sum you borrow from a bank or credit union that you pay back over time. Qualifying for a personal loan generally hinges on having a good credit score. The higher your score, the more likely you are to get approved to take out a personal loan, and the greater your chances of snagging a decent rate.
The latter is important, because for a personal loan to make sense as a borrowing option, it needs to be attached to a competitive interest rate. The rates on personal loans are often lower than those of credit cards, for example. So if you’re sitting on existing debt that’s costing you a lot in interest, taking out a personal loan to pay it off could be a smart move.
Is a personal loan right for you?
One benefit of getting a personal loan is that you can use the proceeds from that loan for any purpose, thereby buying yourself flexibility. By contrast, when you take out an auto loan, it can only be used to finance a vehicle, and a mortgage can only be used to purchase a home.
Personal loans are also a good way to consolidate existing debt. As mentioned above, if you owe balances on different credit cards and aren’t able to do a balance transfer, then a personal loan could be another viable solution, if you qualify.
Also, personal loans don’t count toward your credit utilization — a component of your credit score that measures how much of your credit you’re using at once. As such, taking one out won’t hurt your credit the same way charging up a credit card balance will.
But personal loans have their drawbacks too. For one thing, you can get stuck with an extremely high interest rate if your credit isn’t all that good. The average annual percentage rate on a personal loan is 9.41%, reports Experian, which is competitive compared to credit card interest in general, but expensive nonetheless. And some personal loans charge hefty fees just to open them, so that’s an added cost to consider. Plus, in some cases, you could get penalized for paying off a personal loan early.
If you’re going to get a personal loan, shop around for one carefully. Even though personal loans are becoming more popular, as evidenced by Experian’s findings, there may be a more affordable way for you to borrow money, like taking out a home equity loan, so explore your options thoroughly before making a decision.
View more information: https://www.fool.com/the-ascent/personal-loans/articles/fastest-growing-type-debt-us/