Borrowing money to finance large purchases is a very common practice in America. After all, if we all had to wait to make purchases until we could pay in full in cash many of us would be waiting a very long time - if not forever - to save up those funds. The ability to make purchases on credit or using a loan is what enables us to buy big-ticket items otherwise outside our price range.
So, it may come as no surprise to find out more Americans are taking on personal loans. According to a recent report from Experian, personal loans are actually the fastest-growing debt category in the U.S., with year-over-year growth of 12 percent. To put that growth in perspective, consider the fact credit card debt is growing at half that rate.
Statistics About Personal Loans in America
Here are some of the key takeaways from the aforementioned Experian study:
Average personal loan balance: $16,259
Average monthly payment: $360
Average Annual Percentage Rate (APR): 9.41 percent
Existing personal loan debt: $305 billion
Percentage of Americans with a personal loan: 11 percent
It's also possible to break down personal loan balance by generation. Baby boomers lead the way with an average balance exceeding $19,000, followed by Gen Xers with personal loans just over $17,000. Millennials carry an average of nearly $12,000. In last place, members of Gen Z carry around $4,500 in personal loans - but are also seeing the highest increases among any age group.
Why Do People Take Out Personal Loans?
There are many reasons someone might decide to take on a personal loan from a bank, credit union or online lender.
Some people use a personal loan to consolidate their debts - using the funds to pay off other outstanding debts with higher interest, like credit cards, then sticking to a fixed repayment plan with lower interest. This strategy tends to be most advantageous for people with high credit scores; without solid credit, it's difficult to qualify for low APR with poor credit. As these Freedom Debt Relief reviews illustrate, those struggling with serious debt but who may not qualify for favorable consolidation terms may need to pursue another strategy - like debt settlement - instead. It all depends on the types and amounts of debt you're carrying, as well as your credit score and income stream.
Another use for personal loans is to finance home remodeling projects. As one expert notes for Bankrate, personal loans can help fund home projects, "whether you want to put on a new roof, install solar panels, remodel your kitchen or add a swimming pool, hot tub, landscaping or hardscaping." One advantage of using a personal loan rather than a home equity loan is you can avoid offering up your home as collateral, which is a risky move.
Some people decide to take out personal installment loans to cover purchases to large to buy outright - such as vacations, weddings, sports equipment and the like.
Of course, some Americans feel they have no choice but to take on a personal loan in light of an unexpected expense - like medical bills, dental work, a family funeral, a vehicle malfunction, a trip to the emergency vet and anything else life may throw at you. While this is one option on the table, it's advisable to pad your emergency fund as much as possible ahead of unanticipated expenses. Most experts recommend having at leastthree to six months' worth of living expenses stashed away, which can help you avoid putting emergency expenses on credit or having to take out a personal loan.
More Americans are taking out personal loans, whether to finance a large purchase or consolidate debts. While this can be a useful strategy, it's important to know the pros and cons before committing.