Why People Take Out Personal Loans
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Debt balances are on the rise in America, with total consumer debt up by $1 trillion in the past five years. While Americans are borrowing more overall, the popularity of one type of debt in particular has shot up: personal loans.
Personal loan statistics show that the number of outstanding personal loans currently stands at nearly 20 million today, and have a combined balance of more than $125 billion. The demand for personal loans has certainly increased. The amount owed on personal loans is more than twice what it was five years ago, and the number of outstanding loans rose 50% in the past three years.
A new LendingTree study delivers a closer look at the reasons consumers are getting new personal loans, and what they plan to do with their newly-borrowed funds. This analysis of anonymized data of borrowers seeking unsecured personal loans through the LendingTree platform also shows how the reasons for borrowing with personal loans can vary across states and credit score profiles.
- Managing existing debt is far and away the most popular reason for a personal loan, representing 61% of all loan requests in 2018. Thirty-nine percent of borrowers plan to use their loans to consolidate debt, and 22% plan to use it to refinance credit cards.
- Consumers seeking personal loans to manage debt also requested the highest origination amounts: $14,107 average amount for credit card refinance, and $12,670 for debt consolidation.
- Almost 15% of loans reasons are categorized as “other” — the third most popular choice. Home renovation and improvement loans are the next-most popular loan purpose, accounting for 7.7% of loan requests with an average loan amount of $12,384.
- Fewer than 1% of borrowers use their loans for business costs, home buying, or green loans.
- Borrowers with really great credit scores or really poor credit scores are less likely to use their loans to manage existing debt.
- New Englanders are the most likely to use their loans to manage existing debt, taking the top five spots. The residents of Mississippi, Louisiana, and Arkansas are the least likely.
How borrowers are using personal loans
Our study reviewed data on people who want to get personal loans, by their stated purpose of borrowing.
Debt management is by far the most popular use of personal loans — six in 10 wanted a loan to refinance credit cards or consolidate debt. Indeed, this can be a smart use of a personal loan if it helps the borrower secure a lower interest rate, simplify debt, or adjust monthly payments.
Of the other possible uses, using loans for home improvement was the next-most popular option at 7.7%. And making a major purchase (3.5%), paying medical bills (3.0%) and borrowing to move (2.7%) were about equally popular reasons to get a personal loan.
That’s a look at personal loan borrowing overall — but how loan seekers plan to use these funds can vary by their home state and credit score.
Here’s an overview of profiles of personal loans by how they’re used:
Why people are getting personal loans in each state
When looking at loans requested by state, there are some big differences in how borrowers plan to use loan funds. This table provides a full overview of how borrowers say they plan to use personal loans in each state.
Here are some highlights of how loans are used in different states:
- The mysterious “other” category, which catches all purposes not stated, is a top pick for residents of many states — but is most commonly cited in the District of Columbia (25.4% of loan requests) and New Mexico (24.7%).
- In fact, the District of Columbia is home to the highest rates of a few offbeat loan purposes, with more residents requesting loans here for a move (7.4%) or business (2.6%). It’s also tied with New York and Louisiana as the place where wedding loans are most requested, with 1.5% of loans in these states intended to cover the costs of tying the knot.
- West Virginia is the top state for borrowers requesting loans for their home, specifically home improvements (8.6% of loans requested in this state) or home buying (4.9%).
- In Wyoming, residents request personal loans for medical expenses more than anywhere else (6.5%). In fact, most of the states where people are more likely to request a loan for medical costs are low-density states with more rural areas.
How credit scores affect personal loan use
Lenders use credit scores as indicators of a borrower’s ability and likelihood to repay debt. But the factors that play into credit scores can mean that they also reflect the bigger picture of a borrower’s finances.
Here’s a look at how personal loan use maps to borrowers’ credit score profiles.
Borrowers with low credit scores (below 600) are more likely to be seeking a personal loan for “other” purposes. This could include seeking out alternatives to payday loans, funds to cover everyday expenses or help paying for an emergency. They’re also most likely to seek a personal loan to cover medical costs.
People with poor credit are also the most likely to request loans for moving expenses, which could indicate that they are relocating to chase better opportunities — and the least able to pay for a move out of pocket.
Loan seekers with credit scores in the fair-to-good range (600 to 750) are the most likely to be seeking a personal loan to consolidate debt or refinance credit card balances.
Those with excellent credit (750 to 850) are more likely to leverage personal loans for big-ticket items. Borrowers in both the 750-799 and 800-850 ranges made a higher than average percentage of loan requests — in some cases, significantly so — in the categories of major purchases, businesses, home buying and home improvements.
Interestingly, borrowers with both poor credit and excellent credit were more likely to seek loans for car financing and vacations.
Americans overwhelmingly use personal loans to tackle debt
Overall, 61% of personal loans are requested with the intent to restructure debts. This includes 39.2% of people who plan to use a personal loan to consolidate debt, and 21.8% who are looking to refinance credit card debt.
Borrowers with higher credit scores are less likely to seek a personal loan for debt consolidation, which could be because they are keeping debt manageable (as reflected by their high scores). Those with low credit scores, on the other hand, might not be looking to consolidate debt because they could have trouble getting a loan or credit card to begin with.
This leaves borrowers with fair-to-good credit (600 up to 749) as the most likely to request personal loans for credit card refinancing and debt consolidation.
In particular, people with credit scores at the higher end of this range, 650 to 749, are the most likely to be using a personal loan to restructure their debt. They are also more likely to benefit from this move — their credit scores are high enough to make it more likely that they can get approved for a personal loan and qualify for lower personal loan rates.
Here is a complete breakdown of how Americans with different credit score ranges use personal loans for debt consolidation and credit card refinancing.
Borrowers in certain states are also more likely to use a personal loan to help tackle debt or credit card balances. Debt consolidation loans are most popular in Utah, Idaho and New Hampshire — accounting for just over 35% of personal loans requested in these states. Credit card refinancing is most popular in the Northeast, particularly New England — residents of Connecticut, Rhode Island, Massachusetts and Vermont top the list of loan requests for this purpose.
Here’s an overview of each state’s use of personal loans for debt consolidation or credit card refinances.
Why borrowers are turning to personal loans to handle debt
Six in 10 personal loans are used for debt consolidation or credit card refinancing, which shows that many people are aware of the benefits of personal loans to manage debt. With debt consolidation and credit card refinancing, a borrower takes out a new personal loan and uses the borrowed funds to pay down other existing debt.
Replacing old debt gives them a chance to combine various accounts into a single loan, simplifying debt and making it less likely to lose track of a loan or miss a payment. This new loan gives a borrower a chance to choose a lender, loan length and monthly payment that better fits their current needs.
It can also be a chance to secure a lower interest rate, which can decrease interest costs — saving money and helping borrowers get out of debt faster. Using personal loans to pay off credit cards, in particular, can be a wise option for many debtors, as personal loan rates often beat what borrowers are currently paying on credit card balances.
Because personal loans can offer lower rates than credit cards and other products, they can also be a smart choice for financing big purchases that can’t be covered out-of-pocket. Taking out a personal loan for a wedding or a vacation, for example, can be more sensible than charging these expenses to a high-interest credit card.
A personal loan isn’t right for every borrower, however. For some expenses, such as a vacation, it might be better to wait, save and pay for this purchase in cash. And if you’re refinancing credit cards or consolidating debt, you need to have a plan in place to manage those accounts so you don’t run up balances again.
Overall, personal loans are a versatile credit product that can be used for a wide range of purposes. It’s important to shop around for a personal loan to ensure you’re getting the best possible deal. With better the loan terms and rates you can find, a personal loan will be less burdensome on your finances as you pay it off. In this case, personal loans can be an ideal alternative to credit cards, as well as a clever way to consolidate and manage debt.
Analysts reviewed the anonymized customer data of borrowers who sought personal loans on the LendingTree marketplace in 2018.