These days, more and more Americans are turning to personal loans. This usually happens because people are trying to replace a lack of savings, especially if an unpredicted situation occurs.
Kevin Gallegos, Vice President of Freedom Financial Network, stated that “personal loans are not necessarily problematic themselves. They can actually be quite helpful when consumers use them for things such as paying off credit cards.”
No matter how people choose to use personal loans, they are most certainly on the rise and becoming more popular. Statistics from TransUnion show that the number of consumers getting loans increased by 18% in the 3rd quarter of 2013 (from 23 million to 27.3 million within just two years). There’s an estimated $82.52 billion worth of unsecured loans and $165.46 worth of secured ones.
Unsecured loans: what to watch out for
But there are certain things to consider prior to applying for a personal loan. Priyanka Prakash, a financial specialist at Fit Small Business, said: “it may appear that such loans are a good way to borrow money without strings, but there are risks.”
One thing to consider is that when lenders claim to offer unsecured personal loans, the borrower may believe that this frees them from being responsible for late payments. But that may not be the case. “Unsecured” means “no collateral,” such as real estate needed for obtaining the loan. However, lenders can still require you to personally guarantee the loan and demand responsibility for paying it back. Otherwise, they have the right to go after personal assets.
Additionally, unsecured personal loans often have a higher interest rate due to not requiring collateral. “Higher interest rates can make it more challenging to afford monthly payments, making the debt even worse,” says Prakash.
Katie Ross, Education and Development Manager at American Consumer Credit Counseling, stated that, with unsecured loans, borrowers can pay much larger payments each month, and there can be early settlement fees. There could be credit damage and penalty fees, and interest rates can increase if monthly minimums are not met.
Ross said that “unsecured personal loans are often presented as being complicated – masking all the additional cash that the lenders will receive in the end. If you are offered different options, like cash back or payment holidays, you should mark this as a red flag.”
To loan or not to loan
Personal loans can become problematic for those who use them to pay for daily expenses or establish an emergency fund. The main rule for personal finance is to remain within your means. If you are not able to do this, look for a way to reduce your expenses or increase income.
For more advice, check out our articles where we debunk common loan myths and answer questions about student loans. Should you have some tips of your own, don’t hesitate to share in the comments section below!
[Featured image credit: Nathan Goodwin, image cropped]