A new survey by Bankrate.com has found that roughly one in 10 Americans will turn to a personal loan in the next year to meet their financial needs. The survey took place between Jan. 7-10 and involved more than 1,000 U.S. residents.
The Ins And Outs of Personal Loans
Like most financial products, personal loans have pros and cons. Most personal loans are unsecured, meaning that they don’t require any type of collateral to back them up. Unfortunately, lenders must typically protect themselves from the risks of unsecured loans by charging higher interest rates than they do on secured debt. Bankrate recently found that the national average interest rate on personal loans is currently about 11.0%.
While 11% it not a particularly low rate, it is still well short of the national average credit card interest rate of 15.1%, meaning that personal loans can offer many Americans a lower-rate alternative for credit card debt consolidation.
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According to Quizzle.com CEO Todd Albery, the flexibility of personal loans adds to their appeal. “Personal loans can be used for everything from a medical procedure to the purchase of a home,” he explains. “[They] are extremely flexible, and the more people learn about them, the more open they are to the idea.”
Millennials and personal loans
The Bankrate survey found that personal loans are particularly popular among younger borrowers. In fact, twice as many respondents aged 18-29 reported that they are likely to take out a personal loan in the next year than any other age group.
Perhaps one explanation for this trend is the explosion of online lenders in the wake of the Financial Crisis. Tech-savvy Millennials no longer have to deal with the hassles of going to banks and haggling for low interest rates on personal loans.
Online lenders like Prosper and Lending Club, allow borrowers to take advantage of their lending marketplace platforms to shop for the lowest rates and the best terms on personal loans.
The graphs below show the explosive lending growth of these two market leaders, who are just two of the dozens of online lenders that have burst onto the scene in the last decade.
The future of personal loans
Many borrowers are aware that personal loan rates will likely never be lower than they are today, at least not for the next several years. The Federal Reserve’s recent decision to raise interest rates for the first time since the Financial Crisis means that a new rate hike cycle has begun.
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Although personal loan rates have yet to be meaningfully impacted by the modest rate hike, borrowers are taking the opportunity to lock in low rates while they still can.
Despite Fed tightening, the cutthroat competition among lenders will likely ensure that personal loan rates will remain favorable compared to credit card rates. More competition among lenders means more pressure to maintain lower margins, lower rates and better terms for borrowers.
As long as these trends persist, personal loans will continue to gain popularity among borrowers of all ages.