Consumers Turning to Personal Loans Over Credit Cards
The number of people taking loans in the US has been steadily on the rise in the years since the mortgage crisis. As the economy recovers, the number of people taking on credit has been rebounding, though in much better health than before.
However, more and more consumers are eschewing traditional credit alternatives in favor of better deals and safer terms thanks to a bevy of new loan options. While credit cards remain one of the most common means of borrowing, personal loans have been displaying a steady climb in popularity.
Personal loans, which are unsecured, have been expanding in reach thanks to a more consumer-friendly approach that widens credit eligibility and favors short, fixed-term repayment over rolling interest. In recent years, personal loan issuance has been rapidly expanding while the rate of growth for credit cards remains modest.
As their availability for consumers increases, personal loans could continue to see major gains versus more traditional credit products.
Personal Loans Rising in Popularity
The personal loan industry, which many saw as dying in 2008, has been staging a resounding comeback in recent years. While many banks had abandoned these smaller loans in favor of home equity lines of credit and credit cards that provided higher rates, a large percentage of the industry is now returning to the practice. Led by a slew of nonbank lenders, the lending industry has been on the rise, expanding its reach and beginning to challenge the more traditional lending products.
The statistics show personal loans quickly gaining ground on credit cards, with marketplace lenders reporting an 86.00% increase in loans issued, with $5.4 billion in credit issued in 2016. In the third quarter alone, personal loan balances topped $100 billion for the first time, with balances increasing by 20.90%. Meanwhile, credit card balances expanded by a much more subdued 7.00% growth rate year over year.
There are several factors that have led to the changing landscape within the lending market. For one, personal loans are increasingly accessible to wide swaths of the population. While originally most personal loans were extended by banks, today, a robust marketplace lending ecosystem has grown thanks to evolving technology and better access to funding. Companies such as Lending Club and SoFi helped disrupt the lending world, and can usually offer their services to a wider demographic of customers, even those with less-than-perfect credit.
More importantly, personal loans have managed to offer better and more reliable terms to potential borrowers. Credit cards are notorious for their high interest rates, with some reaching as high as 79.90% in some cases. Additionally, credit cards do not offer fixed repayment terms, meaning that interest can compound indefinitely and growing the cost for consumers over the long run.
On the other hand, personal loans can offer a short-term solution with more competitive rates and flexible terms. Today, most personal loans provide fixed repayment terms between three and five years, with interest rates ranging between 3.00% for borrowers with excellent credit to 16.00%. While credit cards might be good for quick purchases, many consumers have begun to shy away from prohibitively high interest rates when making large payments.
Who Will Win the Lending Race?
While credit cards remain a popular option due to the simplicity of the credit system, personal loans are quickly establishing a strong niche for borrowers who are looking to consolidate existing debt or make larger payments without burdening themselves further.
The personal loans marketplace is quickly evolving, thanks to advances in technology that enable faster qualification for a wider range of borrowers. While many marketplace lenders have gone under, major competitors remain and recently, banks have started reentering the market. With more competition, consumers can expect to see even better rates and terms with a much wider variety of loan options as time passes. This combination could make personal loans an increasingly attractive option to borrowers from all walks of life as they explore their growing credit options.
If you're ready to take the next step and apply for a personal loan, check out our comparison of the best loan companies available in the business.