Have you found yourself in need of more cash lately? If so, you’re not alone.
Over the last decade, the number of people with a personal loan has nearly doubled from around 11 million in 2010 to around 21 million in 2020, and personal loan debt has nearly tripled from $55 billion to $162 billion.
But who is borrowing all of this money? Where is it coming from? And most importantly, what has COVID-19 done to the personal loan landscape? Let’s find out from the funds deposited today.
- The average new personal loan amount is $6,825.
- Personal loan interest rates are near an all-time low, with a 24-month loan averaging 9.5% in May 2020.
- In early 2020, above-prime borrowers held around 40% of outstanding loan balances; an increase from around 33% in 2013. This trend will continue as stricter underwriting practices are enacted.
- In June 2020, 20% of Americans with personal loans were concerned about their ability to pay their personal loan.
- The number of personal loans in hardship increased from 3.58% in April 2020 to 6.15% in May. Only 0.28% of personal loans were in hardship in May 2019.
- As of 2019, there were 33 states that still allowed payday loans and did not regulate the interest rate.
- Americans with income over $100,000 are more likely to consider taking out a personal loan than those with lower incomes.
- The delinquency rate on personal loans is the highest it’s been since 2013.
- Interest rates on payday loans in 2019 ranged from 154% in Oregon to 677% in Ohio.
- 2% of Americans would need to use a payday loan, deposit advance, or overdraft to cover a $400 emergency expense. 12% of Americans wouldn’t be able to pay the $400 expense by any means.
- 3% of American adults have used a payday loan or paycheck advance.
The average new personal loan is for $6,825
Different types of personal loan providers originate personal loans for different amounts. For example, credit unions, on average, loan less per loan than banks and fintech companies.
Here’s how it breaks down:
Data source: TransUnion Monthly Industry Snapshot, May 2020.
Interest rates for personal loans are near all-time lows
In recent history, interest rates on personal loans varied from 10% to 28%, depending on your credit score. However, the average interest rate on a 24-month personal loan from a commercial bank was 9.5% in May 2020, a decrease from 10.63% in May 2019.
If you’re in the market for a personal loan, check out The Ascent’s picks of the best personal loan companies.
Americans with higher credit scores are more likely to have a personal loan
TransUnion uses the VantageScore 4.0 categories to classify an individual’s overall risk score:
- Super prime (781–850)
- Prime plus (721–780)
- Prime (661–720)
- Near prime (601–660)
- Subprime (300–600)
Personal loans were traditionally marketed toward subprime borrowers, but fintech changed that a few years ago. In early 2020, above prime-borrowers held around 40% of outstanding loan balances, an increase from around 33% in 2013.
In May 2020, the risk distribution of personal loans held steady from the previous month and year. If your credit score is not as high as you’d like, The Ascent has pulled together some loans for people with bad credit.
More Americans are getting more personal loans
Data from TransUnion shows unsecured personal loan trends from the first quarter of 2019 to the first quarter of 2020:
- The number of Americans with personal loans increased from 19.3 million to 20.9 million.
- The total number of personal loans in the U.S. increased from 21.4 million to 23.4 million.
- The average amount of personal loan debt per borrower increased from $8,618 to $9,025.
- The total balance of personal loans in the U.S. increased from $143 billion to $162 billion.
The average balance of personal loans across all borrower risk categories increased by 0.6% from April to May 2020. This increase was driven solely by borrowers with the highest credit scores.
Super prime borrowers were the only group whose balances increased, up 1% from April to May 2020, while loan balances for prime borrowers decreased 1.9%, subprime decreased 1%, prime plus decreased 0.8%, and near prime decreased 0.6%.
This is no surprise because overall, Americans with personal loans paid on average $224 more than their minimum payment in May, up from $215 in April 2020 and $170 in May 2019.
Americans are concerned about paying their personal loans
The 20.9 million people with a personal loan at the beginning of 2020 was an 8.3% increase from the year prior. From 2019 to 2020, the number of Gen Z borrowers increased 42.8% and the number of millennial borrowers increased 12.6%.
Even though the number of Gen Z borrowers increased dramatically from 2019 to 2020, only 16% were concerned about paying their personal loans in June 2020. That’s similar to the proportion of baby boomers and less than millennial and Gen X borrowers who reported being concerned.
Overall, 20% of all Americans with personal loans said they were worried about their ability to pay their personal loan.
Data source: TransUnion Financial Hardship Report – Wave Ten.
Some Americans need personal loans to pay bills and loans
COVID-19 has put a financial strain on Americans; some 16% of Americans plan to apply for personal loans to help pay bills and other loans.
Of those with income over $100,000, 21% are considering a new personal loan compared to 14% of those with income below $100,000.
Data source: TransUnion Financial Hardship Report – Wave Ten.
Of those with a personal loan in June 2020, 22% have been given a financial accommodation due to COVID-19, which is down 3% from the month before.
The top three repayment preferences for loan accommodations are
- creating a repayment plan to catch up gradually while making regular payments,
- extending accommodation for another few months, and
- paying off all postponed payments with a lump sum.
In addition to personal loans, our study shows that Americans are finding other ways to cope with lost income during the pandemic, as well.
Washington and Florida have the largest number of personal loans in hardship
TransUnion labels delinquent accounts in hardship if the account has been affected by a natural or declared disaster, is in forbearance, is reported as deferred, is past due, or is frozen. A number of banks and lenders are helping customers affected by COVID-19 by offering forbearance or other forms of assistance.
Across all states, 6.15% of personal loan accounts were in hardship in May 2020. The states with the largest percentage of personal loans in hardship were
- Washington (10.76%),
- Florida (10.35%),
- Colorado (9.02%), and
- New York (8.91%).
This is not surprising as Washington, Florida, and New York have all been hit hard by COVID-19.
The states with the lowest percentage of personal loans in hardship were
- Wyoming (2.15%),
- West Virginia (2.42%),
- Alabama (2.42%),
- Maine (2.6%), and
- Mississippi (2.89%).
Wyoming, West Virginia, and Maine are likely on this list as they have seen relatively low numbers of COVID-19 cases.
Across all states, the number of personal loans in hardship increased from 3.58% in April 2020 to 6.15% in May. In contrast, only 0.28% of personal loans were in hardship in May 2019.
This may seem to contradict the data that shows Americans are making more than the minimum payment on their personal loans. A possible suggestion for this is that those with higher income were more likely able to make higher payments toward debts, while those with lower income had to stop or defer payments toward debts due to employment changes from COVID-19.
No lender type is immune to COVID-19 difficulties
Among lender types, fintechs have the largest percentage of personal loan accounts in hardship (8%) followed by banks (5%).
Banks, however, have the largest average personal loan amount ($13,514), followed by fintechs ($10,338).
The delinquency rate on personal loans at all commercial banks was 2.47% in early 2020; it hasn’t been that high since the second quarter of 2013 when the U.S. was still recovering from the Great Recession.
Delinquency rates were greater than 4% from 2008 to 2010 and then declined steadily until they stabilized in 2015.
Payday loans are the only option for some Americans
Payday loans are a form of alternative financial service that provide fast cash and have a short repayment period. The problem with payday loans is the high cost that can trap borrowers in a vicious cycle.
As of 2019, there were 33 states that still allowed payday loans and did not regulate the interest rate.
Interest rates on payday loans at the time ranged from 154% in Oregon to 677% in Ohio. The fees and interest on payday loans are different from traditional loans and end up costing the borrower far more.
The Board of Governors of the Federal Reserve System issued a report on the economic well-being of U.S. households in 2019, with supplemental data from April 2020. The report showed that 2% of Americans would need to use a payday loan, deposit advance, or overdraft to cover a $400 emergency expense. Twelve percent of Americans would not be able to pay the $400 expense by any means.
An earlier project from The Pew Charitable Trusts reported that 69% of Americans use their first payday loan for recurring expenses, such as utilities, credit card bills, rent or mortgage payments, or food. That fact debunks the common perception that payday loans are short-term solutions for unexpected expenses.
According to the Federal Reserve, in 2019, 6% of adults in the U.S. did not have a checking, savings, or money market account. Half of those adults used some form of alternative financial service — money order, check cashing service, pawnshop loan, auto title loan, payday loan, paycheck advance, or tax refund advance.
Another 16% of adults in the U.S. had a bank account but also used alternative financial services. Of all adults in the U.S. who used alternative financial services, 15% borrowed money using payday loans or paycheck advances. Among the entire adult population, 3% used a payday loan or paycheck advance.
The government is updating guidance on small-dollar loans
In May 2020, the Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration, and Office of the Comptroller of the Currency issued joint guidance to financial institutions to encourage them to offer responsible small-dollar loans.
The agencies previously issued separate, conflicting guidance. This joint venture aims to provide uniform principles for all financial institutions. The move comes after the agencies made a joint statement in March encouraging banks, savings associations, and credit unions to offer responsible small-dollar loans in response to COVID-19.
Small-dollar loans can help Americans handle temporary cash shortages, unexpected expenses, or income loss during periods of economic stress or disaster recoveries. Financial institutions that are federally regulated must offer loans that are consistent with safe and sound principles and comply with regulations, including consumer protection laws.
If you are eligible for a small-dollar loan from a financial institution, it is a safer and less expensive method of borrowing than a payday loan.
- Board of Governors of the Federal Reserve System (2020). “Delinquency Rate on Consumer Loans, All Commercial Banks.”
- Board of Governors of the Federal Reserve System (2020). “Report on the Economic Well-Being of U.S. Households in 2019.”
- Board of Governors of the Federal Reserve System (2020). “Finance Rate on Personal Loans at Commercial Banks, 24 Month Loan.”
- Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency (2020). “Joint Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19.”
- Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency (2020). “Interagency Lending Principles for Offering Responsible Small-Dollar Loans May 2020.”
- Center for Responsible Lending (2019). “Map of U.S. Payday Interest Rates.”
- Chamber of Commerce (2020). “Personal Loan Statistics.”
- Federal Reserve Bank of St. Louis (2019). “Fast Cash and Payday Loans.”
- The Pew Charitable Trusts (2012). “Payday Lending in America: Who Borrows, Where They Borrow, and Why.”
- TransUnion (2020). “Consumer Credit Origination, Balance and Delinquency Trends: Q1 2020.”
- TransUnion (2020). “Financial Hardship Report – Wave Ten.”
- TransUnion (2020). “May 2020 Monthly Industry Snapshot.”
- TransUnion (2020). “Q1 2020 Financial Services Industry Insights Report.”