Credit card debt has been a source of misery for most Americans while college tuition loans are a threat to financial profile.
However, there is another form of debt that has gained popularity in the recent past. As more lenders get finances, there has been a rise in online loans that are easy to access. This has led to an increase in the number of people with active personal loans in the US. According to a research conducted by the TransUnion, the number of US residents with these loans has risen to 27.34 million between 2013 and 2015.
In addition, at least 100 people out of 1000 confirm that they are likely to take a new personal loan within 12 months. Among the individuals considering the debt, 20% are aged 19-29 years. This is according to a research conducted by Bankrate.
It is evident that the appetite for the loans is rising among the young Americans. While this has not been the case in the past, the trend can be attributed to a few reasons. The number one cause is the absence of an emergency fund dedicated to addressing unexpected expenses like car repairs and medical bills. In fact, 63% of adult Americans admit they are not prepared to meet sudden expenses.
In the last few years, people without an emergency fund plan would run to credit cards, but all that has changed. Most people are attracted to personal just right loans offered on the online platforms. With startups like Lending Club and Prosper gathering significant funds, they can afford to give out easy loans. Notably, Lending Club is the first peer to peer business to trade in the public domain. Its business model allows it to get money from investors and lend to other individuals.
The online lending industry is thriving and is the reason why huge finance players like JP Morgan Chase & Co. has acquired almost $1 billion in Lending Club loans. With such transactions taking place in the industry, there is no doubt people have confidence in this market.
Before the online lenders rose to popularity, getting a loan was not easy and you had to make several visits to the local bank. However, some banks don’t offer personal loans without sufficient collateral. In most cases, you were required to secure the loan with your home or vehicle.
What are the costs?
Among the most popular lenders are Avant, Lending Club, and Prosper. Although the loans are easy to get, the rates can be high depending on factors like credit scores and applicant’s location. Avant loans are charged between 9.9% and 35.9% and the repayment duration is 2-5 years. While interest rates at Prosper and Lending Club are different, they can easily go beyond 20%. A typical loan with Prosper attracts 5.9%-39% in interest.
Some common uses for the funds
A closer look at the behavior of borrowers reveals that at least 80% of loans taken are directed to debt consolidation. In an attempt to climb out of debt, more people are tempted to ease loan repayments by making a single monthly payment. The trend can be attributed to the fear of damaging the credit score due to missed payments, and automating the whole process is very enticing. However, the plan will only be good if you get a deal with a lower interest rate.
The other group of borrowers is spending the money on purchases. Basically, using a personal loan to make a major purchase can be better than charging the amount on your credit card. In a way, it helps you utilize a small proportion of the allocated borrowing limits. This is a clever way of avoiding the negative effects that come with using a high amount of credit limits. In addition, it helps keep credit card debt in control.
The young generation has been habituated to dealing with online loans. Especially for individuals dealing with student loan payments, the idea of online loans has been received well. To sum up, most borrowers are comfortable with the idea of spreading the payments over a specific time. The arrangement is not feasible with credit card debt.
The Risks
Although the service is appealing, it is not obvious you will get approved. For one, you need to have good credit scores to apply. And if you get approved, it is essential to read the loan agreement because some lenders will charge hefty penalties that can leave you frustrated. As a rule of thumb, create a comprehensive budget before taking a loan and ensure that all payments will be comfortably made as stipulated.
If possible, avoid taking the loan if you don’t need to. As you will realize, rates that are above 20% are high to deal with and it can mean being in debt for extended periods of time.
Conclusion
If you have the time, there are some other options that are safer and better. If you are dealing with a health emergency, it’s possible to run an online fundraising where people donate towards the cause. However, strive to create an emergency fund and get started on well-rounded financial planning.
