Personal Loan Facts 2018 – 2019
Most loans are taken out for one of a few reasons. These include paying for automobiles, houses, tuition and other expenses related to college, and medical care. Financial institutions have established different types of loans to deal specifically with each one of these expense types. Lenders structure their terms and payment dates differently and they’ll usually only approve loans if they fall within a certain dollar value range.
For several reasons, these types of loans have recently begun waning in popularity to the likes of personal loans. Let’s look at a few of these reasons and detail a couple of things about personal loans that you might not have known about.
1. Personal loans are unsecured
Traditional loans are secured, meaning borrowers agree to fork over whatever assets they’re borrowing against to lenders if they’re unable to satisfactorily make payments toward their debt. Personal loans, on the other hand, are not secured, meaning that lenders are effectively hung out to dry if people stop paying them back. To curb the potential damages that this problem causes, personal loan lenders charge significantly greater interest rates on these loans.
2. Your credit score matters more than any other factor
For lenders to determine whether they should lend to certain borrowers or not, they seek out various types of financial and personal information directly from borrowers. They also turn to credit bureaus like Equifax and TransUnion to obtain your credit score, a go-to metric that makes the approval process that much easier.
When it comes to personal loans, lenders place much more emphasis on applicants’ credit scores than they do any other factor. This is opposed to lenders of non-personal loans placing more value on other factors, such as income.
This is a convention in modern personal loan lending because all such lenders have is borrowers’ promises to pay, rather than the rights to possess their assets if they’re unable to pay.
3. Personal loans are smaller than other loan types
Most banks have loose limits when it comes to the amount of money they’re willing to put down on traditional, secured loans. However, due to the risky nature of unsecured personal loans, lenders place caps on the upper bound of how much they’re willing to hand out.
Keep in mind that while it is possible to sign over your assets as collateral to personal lenders, this isn’t something that many personal loan lenders will accept.
4. Interest rates are high
According to the United States Federal Reserve Bank, the government entity responsible for most things related to finance in the United States, the average interest rate on a two-year personal loan was 10.22 percent in the first quarter of 2018.
You’ll see that traditional loans offer much lower interest rates. Four-year automobile loans made to consumers in the United States brought along average interest rates of 4.74 percent. As the industry continues to grow out of the necessity to borrow money from the growing proportion of low-income United States citizens, interest rates on personal loans are expected to rise in years to come.
5. Nearly half of all Americans have personal loan debt outstanding
As recently as 2015, just 30 percent of Americans held outstanding personal loan debt. According to Experian, 46 percent of United States citizens had personal loans as of the fourth quarter of 2018.
This statistic has risen steadily since the proliferation of personal loans after the turn of the millennium and is likely to keep growing over the next five years, at least.
6. Personal loan amounts are largest in married couples and smallest in the divorced
Recent research shows that the average personal loan amount among married couples in the United States is about $8,600. Divorced persons take out much smaller loans, with loans averaging out to be just $4,100. Single people borrow about $7,100 on average when it comes to personal loans. This is because people typically borrow the most when they’re married, then are either unable or unwilling to take on loans in the future.