“How Higher Interest Rates Are Shaping Personal Loan Usage”

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Understanding the Rise in U.S. Personal Loan Debt

Higher interest rates are changing the way consumers use and perceive personal loans. Today, more consumers appear to be turning to personal loans to consolidate debt and finance major purchases to avoid the bitter pill of higher rates with other financing options.

Total U.S. Personal Loan Debt Increases 9.2%

Like credit card balances, personal loan balances grew sharply in 2023, but not nearly as much as they did in 2022. Unsecured loans—the type offered to borrowers largely based on the applicant’s credit history and income—grew by 9.4% in 2023. Loans secured by assets such as boats, campers, RVs, and other types of collateral grew by a similar amount.

Demand for Personal Loans Has Steadied

Growth in the number of new personal loans softened somewhat in 2023 from the large jump the year prior, when consumers returned to personal loans largely to tame rising credit card rates. Still, there were 25.5 million loans made in the 12 months ending in September 2023—higher than the 21.2 million personal loans originated in 2019.

Average Personal Loan Balances Increase in Nearly All States

The rash of new personal borrowing from last year also calmed some in 2023, although average balance increases are still outpacing inflation by a significant margin. Despite the 9% increase in 2023, that’s still much less than the 17% increase in 2022, when the Federal Reserve first started ratcheting up rates.

Average Balances Are Growing Faster Among Younger Generations

As observed in other types of consumer loans, younger generations are borrowing and owing more on average than baby boomers and other older consumers. Consider again the 6.3% overall increase in balances: Younger generations saw balances increase more than twice the overall rate in some cases, while personal loan balances increased little among older borrowers.

What Borrowers Can (and Do) Expect in 2024

When asked in a recent Experian survey of more than 1,000 consumers, most people suggested they’re aware of personal loans and have made use of them in the past. Nearly half said they plan to use them in the upcoming year.

Let’s take the past first: 57% of survey respondents (ages 21 through 65) said they’ve used personal loans in the past. Among these consumers, about one-third used a personal loan for debt consolidation, while another third used one for a major purchase.

As for the near future, nearly half of those we asked (46%) said they intend to use a personal loan sometime this year. Debt consolidation, major purchases, and emergency expenses are the most popular uses for these loans.

Consumers aren’t the only ones feeling the pinch of higher interest rates. Lenders, as well, need to pay for the dollars they lend to consumers. As their borrowing costs increase, lenders are passing on those costs to borrowers, just as credit card issuers passed on variable APR rates to card users. However, fixed-rate APRs of most personal loans do offer consumers both consistency in monthly payment amounts as well as rates that are typically lower than the average credit card rates if their credit is in good shape.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you navigate your financial journey with ease and expertise.

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