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Personal loans were the fastest growing debt category in 2019, but new data from Experian revealed that this had changed in 2020. While personal loans saw a 12% increase year-on-year in 2019 , the category grew only 1% in 2020 (the slowest for any debt category last year) with fewer people taking out loans.
Payment defaults have also seen a dramatic drop, with 27% fewer accounts past due 30 days or more. On average, personal loan balances were $ 16,458 in the third quarter of 2020.
Almost a quarter (22%) of American adults have a personal loan, according to the credit bureau. Baby boomers led the pack in 2019 with the highest personal loan balances on average ($ 19,253 in the second quarter).
Online marketplaces like Upstart have made it easier to apply for and qualify for flexible loan options, and online lenders like LightStream and Discover Personal Loans offer alternative ways to fund big expenses like weddings and home renovations.
Here are the top reasons people take out personal loans, using data from a 2019 Experian survey:
- Big purchases: 28% of respondents
- Debt Consolidation: 26% of respondents
- Home Improvements: 17% of respondents
- Debt refinancing: 9% of respondents
- Other reason (not listed): 30% of respondents
The average FICO® The score for someone with a personal loan in 2020 was 689, which is considered a good credit score.
Find the best personal loans
If you are considering a personal loan, take a look at your choices both online and with more traditional banks. Experian found that about two-thirds of borrowers surveyed in 2019 (67%) had always obtained their loan from a conventional bank, while 18% had opted for an online-only lender.
Online lenders are known to have less rigid applications and therefore more accessible to people with fair to average credit. And consumers with good credit scores can also benefit from the non-traditional credit approval policies offered by companies like SoFi, which uses a job offer as proof of income (starting within the next 90 days).
However, it is important to remember that loans are not free money. A form of installment credit, personal loans must be repaid in regular installments over a specified period of time. Your interest rate depends on your credit score, income, and borrowing history. Most lenders require you to make payments within 30 days of getting the funds.
Before you apply for a personal loan, figure out how much you’re going to pay in total over the lifetime (including interest and fees) and whether you want to be required to make a monthly payment until it’s repaid. Also consider what kind of ROI you’re getting (for example, a car loan comes with an asset, whereas a vacation loan leaves you with only memories and a monthly bill).
Also, research other sources of cash before making the decision to borrow. A side activity can help you save extra money, or maybe a friend or family member can help. You can also consider a 0% APR credit card, which would pay off the purchase interest-free over six to 20 months.
Consult our list of 10 questions to ask yourself before taking out a personal loan,
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.