More American consumers are taking on personal loans, with one in three — or 38 percent — now holding one and the average balance topping $19,000, according to new data from Experian.
The data shows a growing trend over the past decade. While the number of people taking out personal loans has jumped, the delinquency rate for these loans has stayed steady over the past two years at just around four percent.
RELATED STORY | Six in 10 parents in debt just to support their kids, survey finds
Higher prices for everyday expenses are pushing people to borrow more, and many consumers feel their wages are not keeping up. Four in 10 consumers say they are more likely to get a personal loan this year due to economic conditions over the last 12 months.
Many Americans are borrowing just to keep up, according to economics professor Michael Snipes.
“Whenever you see a spike in loans, that’s an indication that consumers are struggling,” Snipes said.
“That’s an indication that there’s a gap between their wages and their income and their spending,” Snipes said.
“If wages aren’t going up, that’s gonna have to get made up in taking on debt,” Snipes said.
Despite the economic circumstances, personal loans can often be a smart financial tool, according to personal finance expert Erica Sandberg.
“Personal loans are very positive under certain circumstances. They’re a great strategy to get out of debt, but also to pay for things in an installment type of arrangement,” Sandberg said.
RELATED STORY | Auto loan delinquencies on the rise: Here’s what that means for the economy
One of the most common uses is consolidating debt, which includes paying off credit cards. Credit card interest rates can top 20 percent.
Miranda Valencia is a mother of six who has struggled with credit card debt in the past and consolidated her debt to pay it off.
“Such high interest rates, you’re never able to get on top of payments, because you’re just making the minimum payment,” Valencia said.
“It’s often much higher than 20 percent, 24 percent, 26 percent higher. Whereas a personal loan tends to be much, you know, a much lower rate. So you’re having a big difference right there. So it’s a lot less expensive,” Sandberg said.
The lower rate paired with fixed monthly payments can make it easier for borrowers to dig out of debt. But there are risks, too.
“These are not something that you would take on lightly. It needs to be part of an overall personal finance strategy,” Sandberg said.