Few Americans have the cash they need on hand to pay for big-ticket items upfront. That's why it's not unusual for people to take out mortgages, car loans and student loans, so they can pay for these costly expenses over time. Show
But when it comes to other major purchases — like home renovations, engagement rings, medical bills — an increasing number of Americans are turning to personal loans to help manage the cost. Personal loans are the fastest-growing debt category, according to a 2019 Experian study. While mortgages still made up the largest portion of consumer debt (71.7%), in 2019, Americans reportedly took out personal loans at a faster rate than auto loans, mortgages, credit cards and student loans. A form of installment credit, personal loans are sometimes used as an affordable alternative to credit cards because they generally charge lower interest rates. Personal loan APR averages 9.34% according to the Fed's most recent data. Meanwhile, the average credit card interest rate is around 16.6%. Unlike with revolving credit, you don't continue to have access to your loan once you pay it off — a plus for people concerned with getting in over their heads with spending. Here are some ways that people use personal loans. 1. Paying off debtDebt consolidation is the most common reason that people take out personal loans. The average American has about four credit cards in their wallet, and when you run up a balance on multiple cards, it can be difficult to manage all the different bills and APRs. A personal loan can streamline your payments into one monthly bill. Personal loans can also save you on interest. People who refinance high-interest credit card debt can save money with a lower APR. If you have a good to excellent credit score, a balance transfer card offers another way to pay off debt, and you might not have to pay interest. The Citi® Double Cash Card comes with 0% APR introductory period for the first 18 months on balance transfers (then 16.99% - 26.99% variable; balance transfers must be completed within 4 months of account opening and there's an intro balance transfer fee of 3% of each transfer (minimum $5) completed within the first 4 months of account opening. After that, your fee will be 5% of each transfer (minimum $5), and after the debt is gone you can earn 2% cash back on all purchases (1% when you make a purchase and an additional 1% when you pay your credit card bill). If you decide to go with a balance transfer card rather than a personal loan, make sure you have a clear repayment plan so you finish paying off the balance before the intro period ends and you get hit with a high interest rate. 2. Home renovationsAbout 17% of consumers in Experian's study used their loan for home improvements. Whether you're looking to do a full gut job or just upgrade your appliances, a personal loan gives you the option to pay for home repairs with an installment plan. Spending a few hundred dollars per month is probably more realistic for many Americans than dropping $20,000 at once on a new kitchen. However, keep in mind that you pay interest to use a personal loan and the renovations will end up costing more in the long run. If you're not in a rush to do the renovation, it could be more cost effective to make a plan to save the cash you need instead of taking on more debt. For somewhat smaller purchases, like a new washer/dryer, consider a 0% APR credit card like the Chase Freedom Unlimited®. The Freedom Unlimited offers one of the longest periods to finance home renovation projects, with no interest on new purchases and balance transfers over the course of 15 months from account opening (then 17.99% - 26.74% variable APR; there's an intro balance transfer fee of either $5 or 3% of the amount of each transfer, whichever is greater, on transfers made within 60 days of account opening. After that it's either $5 or 5% of the amount of each transfer, whichever is greater). Chase Freedom Unlimited®
Terms apply. 3. EducationFederal student loans are usually the best choice to get a flexible, low-interest loan to pay for college. But if you're just looking to take some online courses or develop a new skill to help advance your career, a personal loan can be a good option to help you afford the education you need to get a better job or qualify for that promotion. Before you sign up, be sure to check for no-cost alternatives first, such as asking your employer whether they sponsor employee professional development. And if you're looking to make a career shift, research what kind of salary you can expect to bring in once you complete your education. It's important to know if you'll be able to afford the loan's monthly payments with your new (and hopefully improved) salary. That will help you decide if the costs are worth it. 4. An emergencyUnfortunately, many Americans can't afford to save for emergencies, and you may need a personal loan to help you cover a car repair, medical bill or day-to-day expenses if you suddenly lose your job. Before you decide to go this route, research all your options. See if you can negotiate down the costs, or set up a payment plan with the mechanic or your health-care provider. And if you've lost your job, find out what unemployment benefits you qualify for so that, if you still need a loan, you can minimize the total amount you need to borrow. 5. Tax debtIf you owe the IRS money that you don't have available in a savings account, you could take out a personal loan to cover the costs. While the IRS does offer payment plans, they come with fees. Do you research before you take out a loan, comparing the fees you'll pay for a IRS payment plan with the total interest you'll pay over the lifetime of your loan. 6. Wedding costsThe average American wedding costs over $33,000 according to The Knot, which is a big chunk of change. If you and your partner are comfortable with idea of taking on debt, you might want to consider a personal loan to pay for your wedding expenses. Of course, your wedding doesn't have to cost nearly as much as the average, but if celebrating your special day in style is high priority, crunch the numbers to see if a loan is the best way to cover the costs. Again, it's important to have a clear payoff plan and understand how the monthly loan payments will impact your overall budget. And if you've got the wedding covered but need cash to pay for the engagement and/or wedding ring, you could look into financing that with a loan, too. 7. A major life changeMoving, divorce, career changes, etc. come with emotional and financial costs. As much as possible, plan ahead for these transitions, but if you're in a pinch and need money to hold you over, you may be able to get a personal loan in a matter of days. 8. VacationsIncreasingly, airlines and travel companies are offering point-of-sale loans to customers who want to escape the winter blues and get away. You can also fund your vacation with a personal loan, though it's not advised. There are better ways to travel that don't drain your resources. If you're fortunate enough to have disposable income, challenge yourself to put it into an existing or new savings account before you borrow money. The Ally Online Savings Account is a good option to save for vacations because you can create up to 10 "buckets," or funds, within the same account. This helps you organize and keep track of your savings goals so you don't have to borrow unnecessarily. Also consider a travel rewards credit card with a large welcome bonus to see if you can cut down the cost of your vacation by cashing in points or miles. The Capital One Venture Rewards Credit Card has a welcome bonus of 75,000 bonus miles once you spend $4,000 on purchases within the first 3 months from account opening. Capital One Venture Rewards Credit CardInformation about the Capital One Venture Rewards Credit Card has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.
Terms apply. What to consider before taking out a personal loanWhile the notion of fast cash sounds great, remember that you'll have to start making payments on your personal loan right away (usually within 30 days). Before you take out a personal loan, make sure you have a clear purpose for it and a plan to pay it back. Keep these things in mind when you do your research:
Select now has a widget where you can put in your personal information and get matched with personal loan offers without damaging your credit score. Find the best personal loansEditorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party. What is the most common type of credit used?The two most common types are installment loans and revolving credit. Installment Loans are a set amount of money loaned to you to use for a specific purpose. Revolving Credit is a line of credit you can keep using after paying it off.
What is an example of a secured credit?A common example of a secured line of credit is a home mortgage or a car loan. When any loan is secured, the lender has established a lien against an asset that belongs to the borrower. With mortgages and car loans, the house or car can be seized and liquidated by the lender in the event of default.
What are the two types of consumer credit that you will probably use throughout your life?There are two types of consumer credit: revolving credit and installment credit. With revolving credit, the person is approved for a specified amount of credit and can use it whenever he or she needs it, as with a credit card.
Which is an example of easy access credit?Easy access credit refers to very short-term and usually very high interest loans. It's a fancy way of saying payday loans, pawn shop transactions, or title loans.
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