The use of personal loans is on the rise in the U.S., with about 24 million Americans likely to take out a personal loan in the next 12 months. That number really turned my head.
What will they use the loans for?
I spoke with Adam Hughes, the chief operating officer at Avant, a personal loan lender, about the industry. The pie chart shows why Avant borrowers are taking out personal loans. More than half are doing it for debt consolidation.
No loan origination fees
Avant isn't a peer-to-peer lender, like Lending Club or Prosper. The company raises money in the capital markets to fund the loans it originates. Avant also doesn't charge borrowers an upfront loan origination fee.
In an earlier blog post, I made the point that a borrower will pay the loan origination fee regardless of whether it's collected upfront, but not having the origination fee paid from the loan proceeds means the cash-strapped borrower won't have to borrow more to cover the loan origination cost.
It also services its own loans, meaning it collects and keeps track of the personal loan payments.
Rate shopping doesn't impact credit score
Like the peer-to-peer lenders, Avant doesn't do a hard pull on your credit report when you're just looking for a rate. That means that rate shopping doesn't impact your credit score. Like any loan, when you close on the loan, it will show up on your credit report.
Currently, Avant originates loans at 9% to 36%, although Hughes mentioned that it plans to offer a 5.99% annual percentage rate (APR) loan in the future. He also pointed out that Avant focuses on consumers with FICO credit scores between 580 and 700.
All else being equal, the lower the FICO score, the higher the interest rate. Don't expect a 5.99% APR with a 580 credit score.
Evaluating the rate versus the need
The higher the interest rate, the less a personal loan makes sense for financing the goals shown in the chart. Debt consolidation doesn't work if your personal loan interest rate is higher than your credit card interest rate.
I'd also recommend that you not finance a vacation at a high interest rate either. That said, an estimated 24 million people are planning to take out a personal loan in the next 12 months, meaning that this type of financing is meeting a real consumer need.
Post a comment if you plan to apply for a personal loan in the next 12 months and tell me how you'll use the money.
In the simplest meaning, asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repaid, the asset is taken. In this sense, a mortgage is an example of an asset-backed loan. More commonly however, the phrase is used to describe lending to business and large corporations using assets not normally used in...