Nearly half of Americans say they intend to take out a personal loan this year, mostly for major purchases and emergencies. Total personal loan balances have already reached $597.6 billion, growing 7.6% in a year, with the average balance at $19,333. Thirty eight percent of adults now carry one, up from thirty one percent in 2017. A product that used to be a niche has become a household staple.
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The Two Loans Hiding Under One Name
A personal loan is either the smartest move on the table or the most expensive, and the difference is entirely what it replaces.
Borrowing at a fixed rate in the mid teens to retire card balances running near 25% is arithmetic. The rate falls, the term is defined, and the balance actually declines every month instead of revolving forever. That is refinancing and it works.
Borrowing at the same rate to cover a shortfall that the budget produces every month is not refinancing. It is postponement with interest attached, and it arrives with a new fixed payment stacked on top of the old problem.
The survey language is the tell. Emergencies and major purchases are two different categories. One is a cash flow failure, the other is a financing decision.
Why Rates Will Not Rescue Anyone
Borrowers waiting for the Federal Reserve to make this cheaper should stop waiting. Markets currently put the odds of a cut by year end in the low single digits. Personal loan pricing is driven more by lender risk appetite than by the funds rate anyway, and risk appetite tightens when delinquencies climb.
The Consolidation That Does Not Consolidate
The most common failure with these loans is not the rate. It is that the cards get paid off and then get used again. Within a year the borrower is carrying the consolidation loan and a rebuilt card balance, which is strictly worse than where they started.
Lenders know this. It is part of why they approve the loans.
Final Take
If you are going to do this, put two conditions on it before you sign anything.
First, run the origination fee into the real rate. Many personal loans carry fees between one and eight percent of the amount borrowed, deducted before the money lands. A loan advertised in the low teens with an eight percent origination fee is not in the low teens. Compare on APR, which is required to include the fee, and never on the headline rate.
Second, close the cards you pay off, or at least remove them from your phone and your browser. Not freeze them. Remove them. The consolidation only works if the balance you retired stays retired, and the evidence on this is not close.
The loan is a tool for converting expensive debt into cheaper debt. It has never been a tool for converting spending into affordability.
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Disclaimer
The content in this email does not constitute an offer or solicitation to buy or sell any financial instrument. All commentary is general in nature and is not directed at any individual investor.
Written by Deniss Slinkins
Millionaire Core
