Have you seen an influx of offers for personal loans showing up in your mailbox? These unsecured loans promise access to capital to help you pay off high-interest credit card debt, make improvements to your home or take a vacation — all at favorable interest rates.
In reality, there’s both hazard and opportunity here for potential borrowers. The key is knowing which is which, according to money expert Clark Howard.
Personal loans offer both hazard and opportunity
The market for personal loans is a growing one. Everyone from big Wall Street firms like Goldman Sachs and American Express to smaller fintech lenders like SoFi and Lending Club want a piece of this $82 billion market, according to The Wall Street Journal.
Lenders sent out a record 1.26 billion solicitation for personal loans in the first half of 2018, according to market researcher Competiscan. The size of the loan offers range from several thousand dollars to in the six-digit range, according to the Journal.
One couple profiled by the newspaper took out a $60,000 loan at a 7% interest for a term of 84 months (seven years) to pay for home renovations.
So…is a personal loan a good idea or a bad idea for your life?
Clark Howard calls the increase in personal loan solicitations a “trainwreck” in the making for lenders. After all, these are unsecured loans so lenders are likely to end up with defaults. By and large, there is no collateral for these personal loans across the industry.
Clearly, there’s big possible hazard here for lenders!
But you shouldn’t overlook the potential upside as a consumer if you’ve received one of the billion solicitations that have been sent out so far this year.
“If you have high-interest debt, this is a great opportunity for you to get out from under it,” Clark says.
You could treat one of these personal loans as a balance transfer offer, essentially. If you can lower the interest rate on an existing debt from double digits to a single digit, that can be a key part of a thoughtful strategy for relieving financial burden in your life.
But Clark has one word of advice for you if you go this route: “Don’t charge your cards back up!”
And therein lies the rub. It would be a huge mistake to take out a personal loan to pay off high-interest credit card without going through some serious financial shock therapy to also change your spending behavior. If you don’t make a change, you’re likely to be in a worse debt situation than your were to begin with in no time at all.