Everything you need to know about personal loans
Outstanding personal loans are now estimated to be worth approximately $120 billion, making that financial issue the fastest growing consumer debt today. It grew 18 percent in the first quarter of 2018, with FinTech companies providing 36 percent.
What is a Personal Loan?
A personal loan is money borrowed from a credit union, online lender, or bank. The borrower needs to pay a fixed amount each month and the term ranges from two to five years. This type of loan is unsecured, which means the lender doesn’t require any collateral.
A personal loan is more expensive than a secured one, though. However, you risk losing the asset if you default on the latter. You can apply for the former for any reason, which is why more people are taking out personal loans, making it the fastest growing consumer debt today.
Borrowers also prefer personal loans to credit cards. The former is cheaper and has a higher limit. If you have balances from various credit cards, you can use this type of loan to merge credit card balances into a single payment that has a lower interest rate.
Reasons for Personal Loans’ Fast Growth
There are several reasons why personal loans have had a fast growth rate in recent years. Even though consumers know that it is not the perfect loan, they still apply for one. Below are some of the factors that sparked the growth of this type of loan:
1. Online Lenders
More FinTech companies invested in online lending and made it more accessible to people. Online lenders accounted for 36 percent of the total number of personal loans in 2017 compared with less than one percent in 2010.
Online realistic loans lenders have become more transparent with their policies, which is why consumers are more comfortable doing business with them. With the proliferation of online providers, a consumer can easily compare them and choose the right one for his or her needs.
Before FinTech and other companies ventured into online financing, consumers could only get personal loans through banks and other lending institutions. The numbers of online lenders also led to the enormous growth, making the loan more accessible to different people. Consumers also embraced the concept because of its convenience.
As more lenders do their business on the internet, the industry becomes more competitive. Competition led to more transparency among companies. Because of these factors, consumers are able to enjoy better rates.
Technology has also played an important role in the growth of personal loans. It gave lenders a new platform on which to offer their services to a wider audience. Potential borrowers can complete an application through the website and receive the funds as fast as one day after the loan is approved.
Advantages of Using Personal Loans
There are many reasons why consumers choose to apply for personal loans. Whether it is for a home renovation, dream vacation, child’s education, or starting a business, the loan allows you to get funding fast, with minimal requirements. Below are some of the pros of using this type of loan.
• Lower interest rates than credit cards – Most personal loans have lower rates than credit cards, especially if you maintain a good credit record. Most credit card companies charge a 15 percent APR or more. On the other hand, personal loans have a 6 percent APR.
• Use on anything – You can use a personal load for many different purposes: medical expenses, shopping, home improvements, and travels, just to name a few. The lender does not ask you where you are going to use the money.
• Easy processing – You can apply for a loan through the lender’s website. There’s no need to go to a branch personally to hand in your application forms. It is a quick process, and you will learn about your approval within a day.
• Pay off all debts – Having multiple loans can be costly. You can use a loan to combine all your other debts so that you only pay for a single account monthly. That means avoiding the accumulation of penalty fees and high interest rates.
• Quick disbursal – As long as you qualify for the loan, you get the money within 72 hours. Some lenders will even send the funds within the day of the approval.
• Smoothens cash flow – There are times when you need money before the next paycheck. When that happens, a personal loan can save the day. It serves as a temporary solution to your financial problem. That way you don’t need to use your emergency fund and are able to keep your cash flow smooth.
• Fixed Interest Rates – A personal loan usual has a fixed interest rate throughout its tenure. You don’t need to worry about changes in your interest rate because it will stay the same until you pay the loan off fully.
Debt Consolidation with Personal Loan
Many consumers use personal loan for consolidation their debts. When you consolidate debt, you save money on interest, and at the same time, pay off your debt faster. Consolidation is ideal when you are struggling to make your payments on time, or have trouble monitoring all your accounts. Once you combine everything into a single account, you can manage your debt better, while saving money as well.
As you can see, personal loans are convenient and accessible. That’s why it is no longer a surprise that it is the fastest growing type of consumer debt today. Consumers are now more aware of it, and they use it for as a solution for short-term financial problems.