Thinking of a Personal Loan? What the Latest Trends Mean for Interest Rates and Approvals
Written by
Jordan Rosenfeld
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Molly Sullivan
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Taking out a personal loan can be a smart way to consolidate debt, cover unexpected expenses or fund a major purchase, but is now the right time to apply?
According to a new TransUnion study on the state of credit products, shifting economic conditions are affecting interest rates, approval odds and borrowing trends.
Whether you’re considering a loan for financial flexibility or necessity, understanding these key insights can help you secure the best terms and avoid costly mistakes. Here’s what the latest data reveals about personal loans in today’s market.
It’s an Expensive Time To Carry Credit Card Debt
For people weighing whether or not they need a personal loan right now, take into consideration the state of credit card interest rates, which is many people’s go-to for spending money they don’t have on hand, according to Charlie Wise, senior vice president and head of global research, at TransUnion.
Interest rates are still high “across a gamut of lending categories,” Wise said, and even the recent cuts by the Federal Reserve Board didn’t provide significant relief. “In the context of a product that typically charges somewhere between 20% and 25% interest, it doesn’t provide a lot of relief,” Wise said.
Ideal usage of a credit card is as a “transaction vehicle,” he said, just a way to facilitate payment, especially if it earns you things like rewards or points back. However, many consumers don’t pay off their credit cards in full every month.
“The concerns are when consumers start to use their credit cards to pay for gas and groceries and they don’t have the ability to pay that off, and they start to accumulate more and more and more balance, which can really hurt after a while in terms of the interest.”
Auto Loans Are Still Expensive
For people who are thinking about a personal loan versus an auto loan, Wise said the auto loan industry is also suffering from what Wise called “stickiness,” even though they are less tied directly to the Fed’s funds rate.
“So even though the Fed lowered rates, we’re still seeing very high funding costs for auto loans because it is a five, six, seven or eight year product and it’s tied to different rates. So, again, as with a lot of things in recent years buying vehicles, the prices are much, much higher than they were.”
The combination of higher purchase prices for vehicles and higher interest rates on those loans is making it harder for consumers to afford auto loans — consumers might end up being stretched in terms of the monthly payments to service those loans.
“At the end of the day, while the interest rate matters, the most important thing that most consumers think about when they’re financing a vehicle is what’s my monthly payment? What can I afford? And you can’t do much about your interest rate at least in the very near term.”
People can either put more money down as a down payment when you’re buying a vehicle to reduce the amount of the loan or stretch the vehicle loan term, meaning the amount of time you’re borrowing for, Wise explained.
Debt Consolidation Loans May Be Cheaper
What people may find themselves doing is taking out a personal loan in the form of a debt consolidation loan, an installment loan, a line of credit or an unsecured personal loan. While these rates also vary, Wise pointed out that if you’re paying 25% interest on your credit card debt, you could potentially find a personal loan for 15% interest.
Not only does that save you a lot in interest, those kinds of loans can be amortized, meaning that you can pay off the total over a set period of time, unlike credit cards, which require a minimum payment until they are paid off.
“Unlike credit cards where if you just pay the minimums, it’s going to take you a long, long time. Consumers can pay off [an amortized debt] in say, three years and then be free and clear.”
Of course, such loans only work if you don’t repeat the process of running up credit card debt again after paying it off.
While things may be tough right now for anyone trying to take out a loan or even use their credit card, Wise is optimistic that things will not stay this difficult for the long term.
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