The Federal Reserve Bank of New York has reported that consumer debt hit a record as of March 31, 2018, with personal loans also surging to a record high. For those that do not know, personal loans often involve the borrower taking on much more risk as the interest rates will tend to be higher that other forms of borrowing. In addition, that form of borrowing is often used as a last resort as well, when other lenders will not provide the funds the person needs.
The total amount of personal loans owed by Americans is estimated at over $120 billion dollars which is a record. More people are also turning to so called fin-tech lenders as well as peer to peer companies. The biggest player in the industry in Lendingclub, which has over a 50% market share.
Now 120 billion dollars in personal debt does not sound like a huge amount when put into context with the fact that Americans owe about 12.9 trillion in total debt. But a couple things. One is the 12.9 trillion dollar amount includes mortgages and college debt, which make up much (about 80%) of that 12.9 trillion figure. The second thing is that the amount of personal loans outstanding increased 18% from Q1 2018 to Q1 2017, so that is incredible growth….which is bad.
What is the risk of personal loan growth?
There are several. Personal loans often come with higher interest rates. While they may not be as high as credit cards, they can still range from anywhere from 10 to 20%. So they are costly. While it is just one example, many of the loans issued by Lendingclub tend to have rates in the 15 to 25% rate. Find more details on peer to peer lenders.
Another risk is that more people took on this type of debt in 2018 to pay for non-emergency expenses. The Federal Reserve Bank of New York reports that more people are using the money to pay for expenses such as a vacation, furniture or maybe a new car. So the borrowing is occurring for probably the wrong reasons.
If anyone borrows money to pay for non-core expenses, like a vacation or maybe new “unneeded” furniture, then that is very risky. Peer to peer lenders or bank loans should never be used for paying those types of bills.
The bottom line is that increasing personal loan volume is not a positive for American consumers or the economy in general. With debt levels increasing, and the federal reserve raising short term interest rates, both of these facts are bad for consumers.