Saving money for a future purchase or an unexpected emergency doesn’t come naturally to us, even sticking to a budget when life expenses pile up. Establishing a budget can take a bit of trial and error, but having a goal in mind—something you’re trying to save for—can make developing responsible financial habits easier.
In some cases, applying for a personal loan can also help you save money. Understanding how personal loans work, how they can affect your credit score, and the scenarios in which to take advantage of them can influence your finances in ways you might not have considered.
For a closer look at the role of personal loans, we surveyed over 1,000 people who had taken out these types of loans in the past. Read on as we explore the top reasons for utilizing personal loans, average interest rates, how they can affect financial stress, and the average amount Americans take out for various expenses.
Dollars and Sense
In 2019, personal loans were one of the fastest-growing debt types in America, with a balance of roughly $300 billion over the year. While there is such a thing as “good debt,” owing too much money compared to your income can be bad for budgeting. It’s important to choose the right kind of debt for the right reasons and that includes deciding when to utilize personal loans.
Among the more than 1,000 people polled who’d taken out at least one personal loan, financing a purchase was the most common reason (37%), followed by consolidating credit card debt (nearly 29%) and paying an unexpected bill (20%). Purchases financed with personal loans included home improvement projects (25%), computers (24%), and vacations (almost 23%).
People most satisfied with the decision to take out a loan were those who used the money to consolidate their credit card debt (about 84%). Credit cards today have reached an all-time high in interest rates, a fact that makes overcoming credit card debt difficult for some people. More than 3 in 4 people who used personal loans to pay an unexpected bill had no regrets after doing do, followed by 63% who used personal loans to finance a purchase.
Lifting the Burden
One of the biggest reasons Americans are so stressed relates to money. No matter how the economy is performing, personal finances can keep you up at night when things aren’t going well.
While 30% of people admitted to feeling ashamed about taking out a personal loan, 31% reported an increased credit score after acquiring their loan, followed by 45% who saw no change in their credit score.
In 2020, FICO changed the way personal loans impact people’s credit scores, establishing them as their own category to help determine if they’re being used appropriately. Compared to 29% of people using a personal loan to pay an unexpected bill who saw a credit score decrease, roughly 33% of people using personal loans to consolidate debt or finance a purchase saw a boost in their score instead.
Perhaps because more than 38% of people had less financial stress after using a personal loan, nearly 46% of Americans reported improved quality of life as a result of their loan decision. Using personal loans had the strongest positive impact on Americans using the money to consolidate their credit card debt.
Making Money Moves
As with any type of debt, the devil is always in the details. 1 out of 3 Americans who took out a personal loan acknowledged they didn’t completely factor interest rate beforehand. Amounts were typically highest among those using money to consolidate credit card debt ($13,498) and finance purchase ($11,763), compared paying an unexpected bill ($4,585).
Taking out a loan for the exact amount needed resulted in the most successful experience, according to our study. Nearly 29% who requested the exact amount for their purchase needs were also the savviest about interest rates and the most likely to have a positive experience.
Even those who took out more than they needed were more likely to have a positive experience than those who took out less. In fact, those who took out a smaller personal loan than they needed were the least likely to understand interest rates and report a positive experience.
Which purchases found people most likely to take out a personal loan? Weddings resulted in some of the biggest personal loans. However, people took out bigger loans for computers than they did for home improvement projects and vacations. But as our study showed, people who financed purchases with personal loans were also most likely to take out a loan for more than they needed.
Crunching the Numbers
According to Experian, the average interest rate on a personal loan is 9.4%, but a majority (56%) of Americans reported taking out loans with above-average interest rates.
Compared to around 44% of people with interest rates of less than 10%,nearly 31% of Americans had interest rates on their personal loans that were 15% or more, including 8% of people with an interest rate of 30% or more.
People who factored in their interest rates before applying for a loan paid an average of 14.2%, compared to those who may not have done their homework and were slapped with a 17.1% interest rate instead.
Doing Your Homework
When it comes to your financial future, understanding loan terms may not be the only thing that matters. More than 1 in 4 Americans who took out a personal loan believed their lender took advantage of them, and nearly 42% with negative lender experiences were penalized for paying off their loans early.
While 3 in 4 people said their lender checked their credit score before issuing a loan, less than 57% of people checked their own score before applying for a loan. Roughly half of the people looked at other finance options or calculated the total interest first, although fewer respondents reported shopping around for personal lenders (40%) or negotiating payment with their lender first (18%).
We found that people who didn’t shop around or research their interest rates before taking out a personal loan experienced the highest amount of financial stress, compared to those who took the time to educate themselves before applying for a loan.
Take Control of Your Financial Future
Taking on the right kind of debt means putting yourself in the right financial situation with the right lenders. Many of the people polled had a positive experience with their personal loans. However, people who endured unexpected penalties for early payments, failed to shop around for the right lender, or didn’t understand interest rates ahead of time were more likely to compound their financial stress rather than alleviate it.
At Crediful, you can trust that we’re passionate about helping you achieve your financial goals. We believe in letting you take control of your money by finding answers to all of your banking, credit, debt, and loan questions in one place. You can research your personal finance options and compare hundreds of financial products to find the perfect fit for your needs. Visit us at Crediful.com to learn more.
Methodology and Limitations
We surveyed 1,043 people who had taken out a personal loan. Around 47% of respondents took out a personal loan a year ago or more recently, while 26% took out their loan more than a year ago, and 27% took one out more than three years ago. Respondents ranged in age from 18 to 78. The average age was 39 with a standard deviation of 13 years.
We did not statistically test our hypotheses. Survey data has certain limitations due to self-reporting, including exaggeration, telescoping, and selective memory. This was an exploratory project on experiences with personal loans.
Fair Use Statement
There are no hidden terms and conditions, so don’t worry about sharing the results of this study with your readers for any noncommercial use. We only ask that you include a link back to this page as credit to our contributors.