Without Savings, More And More Turning To Personal Loans


March 11, 2016 – By Chris Metinko

What you should know about personal loansWith fewer and fewer Americans having any kind of savings to turn to when times get unpredictable, more are looking to personal loans to cover life’s shortfalls.
“Personal loans in and of themselves are not necessarily problematic,” said Kevin Gallegos, a vice president at Freedom Financial Network. “In fact, they can be helpful tools for many consumers using them to help pay off credit card debt.”

Regardless of how people are using them, personal loans certainly are seeing a rise in popularity. According to new numbers from TransUnion, the number of consumers with personal loans has grown 18% from 23.07 million in the third quarter of 2013 to 27.34 million two years later. It is estimated there are now $82.52 billion in unsecured and $165.46 in secured loans.

However, experts say there are some things people need to be careful about before signing up for that loan.

“Getting an unsecured loan may seem like a big win and an ability to borrow money with no strings attached,” said Priyanka Prakash, a finance specialist at Fit Small Business. “However, there are some real risks come with it.”

Prakash said one thing to be careful of is a lot of lenders say they offer “unsecured” personal loans, and borrowers take this to mean they have no responsibility if they fall behind on payments.

“This may not be true,” she said. “Unsecured means no collateral, such as real estate, is required to back the loan, but the lender may still require you to personally guarantee the loan. This means that if you fall behind on payments, the lender can still come after your personal assets.”

She also added that since unsecured personal loans are not backed by any collateral, they often carry high interest rates.

“This can make it hard to afford your monthly payments, and you may end up deeper in debt than you began,” Prakash said.

Katie Ross, education and development manager at American Consumer Credit Counseling, said because of those rates, borrowers can end up paying larger monthly payments — and can end up paying penalty fees for early settlement.

She adds borrowers also potentially subjected to fee penalties, credit damage and even a rise in their agreed-upon interest rate if they are unable to pay the monthly minimum on their unsecured loan.

“An unsecured personal loan can be presented to you with complexities that may seem beneficial on the surface but is actually a way for the lenders to yield more cash at the end of the day,” Ross said. “Such risks are associated with your personal loan if your lender offers you options such as payment holidays or cash back offers. If any of these terms come up in the process of obtaining your unsecured loan consider it a red flag and steer clear of them.”

Gallegos adds personal loans can be problematic if people are turning to them to pay day-to-day expenses, and if they are viewing personal loans as an alternative to an emergency fund.

“The cardinal rule in personal finance is to live within your means,” he said. “If you cannot do so, you must find a way to reduce expenses or increase income.”

He added such loans are best-suited for people who are able to repay their debt in less than a year and can adhere to repayment timeline.

“Personal loans are risky for people who are unable to make minimum payments on current debt,” Gallegos said. “They should look into other help, such as debt settlement or credit counseling.”

Gallegos, however, added personal loans can be especially helpful when credit scores do not reflect repayment capabilities. Some new independent lenders — often known as peer-to-peer lenders — often use different criteria than a traditional bank to evaluate how likely a person is to repay a loan, allowing the consumer to provide information and context about their credit scores.