With fewer and fewer Americans having any kind of savings to turn to when times get unpredictable, more are looking to personal loans to cover life’s shortfalls.
“Personal loans in and of themselves are not necessarily problematic,” said Kevin Gallegos, a vice president at Freedom Financial Network. “In fact, they can be helpful tools for many consumers using them to help pay off credit card debt.”
Regardless of how people are using them, personal loans certainly are seeing a rise in popularity. According to new numbers from TransUnion, the number of consumers with personal loans has grown 18% from 23.07 million in the third quarter of 2013 to 27.34 million two years later. It is estimated there are now $82.52 billion in unsecured and $165.46 in secured loans.
However, experts say there are some things people need to be careful about before signing up for that loan.
“Getting an unsecured loan may seem like a big win and an ability to borrow money with no strings attached,” said Priyanka Prakash, a finance specialist at Fit Small Business. “However, there are some real risks come with it.”
Prakash said one thing to be careful of is a lot of lenders say they offer "unsecured" personal loans, and borrowers take this to mean they have no responsibility if they fall behind on payments.
“This may not be true,” she said. “Unsecured means no collateral, such as real estate, is required to back the loan, but the lender may still require you to personally guarantee the loan. This means that if you fall behind on payments, the lender can still come after your personal assets.”
She also added that since unsecured personal loans are not backed by any collateral, they often carry high interest rates.
“This can make it hard to afford your monthly payments, and you may end up deeper in debt than you began,” Prakash said.
Katie Ross, education and development manager at American Consumer Credit Counseling, said because of those rates, borrowers can end up paying larger monthly payments — and can end up paying penalty fees for early settlement.
She adds borrowers also potentially subjected to fee penalties, credit damage and even a rise in their agreed-upon interest rate if they are unable to pay the monthly minimum on their unsecured loan.