More than one in three people in the United States currently have a personal loan as the number of borrowers reaches a new high. Data from the credit bureau Experian indicates that consumers are increasingly turning to these loans to manage their finances.
Rod Griffin, senior director of consumer education and advocacy at Experian, said the top reasons for the increase include large purchases, emergencies, and debt consolidation. While these loans can serve as financial tools, Griffin warned that debt can become a problem if consumers are not careful.
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Suzanna Flesik, a consumer who struggled with significant credit card debt, said she reached a point where her financial situation felt insurmountable. “We had four, and they were pretty much all practically maxed out,” Flesik said.
At one point, she was informed that her repayment timeline would span decades. “I was told that it would be about 30 years,” she said. “I would be 72 years old when I paid those off.”
Griffin, explained that personal loans typically offer lower interest rates than other forms of credit. This can help borrowers manage their monthly costs more effectively.
“A personal loan typically has a lower interest rate, which means the consumer could reduce their monthly expenses, the monthly cost for the loans, and pay off that debt,” Griffin said. He emphasized that credit should be viewed as a tool rather than a solution for a lack of funds.
The effectiveness of a personal loan depends on the borrower’s understanding of its long-term impact. Griffin said consumers must look beyond immediate relief to consider future implications. “If you’re using it to give you an advantage and you understand what the implications are can be a great tool if you’re using it and not thinking about the future implications,” Griffin said. “That’s when you can find yourself hitting your thumb with a hammer instead of the nail.”
Experian also cautions against using personal loans as a primary emergency fund for unexpected events like medical expenses or storm damage.
Griffin said using debt in these situations can worsen a financial crisis. “In my view, credit shouldn’t be your debt, especially, should not be your emergency fund, because that would potentially compound the emergency, not resolve it,” Griffin said.
Griffin recommends that individuals sit down and take a full look at their finances before applying for a personal loan.
Potential borrowers should ensure the loan fits into their budget and improves their overall financial picture.
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