Tuesday, January 25 2022

Once a staple of consumer banking, unsecured personal loans have become notorious for burdening troubled borrowers with high interest rates and high fees. But loans are moving up as banks offer attractive rates to borrowers with high credit scores.

The change is due to increased competition among lenders to attract customers who are seen as less prone to default. Banks are encouraging consumers to use personal loans to pay off credit cards and other types of debt that carry a higher interest rate.

Lenders originated $ 34.5 billion in personal loans during the first six months of the year, up 8.7% from the same period a year earlier, according to the credit reporting company.

Equifax.

It was the biggest increase for that period since at least 2008.

Personal loans are typically unsecured and can be used for a variety of other purposes, including buying a car, renovating a home, or vacations. If borrowers default, their credit score will likely suffer, but they won’t face foreclosure or sell an asset, as they might if they fall behind on a home or car loan payments.

Lenders often quickly approve loans for borrowers with strong credit, in some cases same day and with relatively little paperwork. Most lenders check borrowers’ credit reports and ask for income information, but proof of income and assets are often not required. Borrowers typically need at least a FICO score of 760, on a scale of 300 to 850, to be in a position to get the best rates.

Greg and Amber Thomas of Bloomfield, Ind., Signed a personal loan with LightStream, an online lending division of

SunTrust Banks,

in May. The Thomases claim to have applied for the loan at a booth that the lender set up at an automobile auction.

Mr. Thomas, a 54-year-old engineer, says the couple went through a credit check and filled out a form asking about their income, the value of their home and whether the home had a mortgage, including other things. That day they were approved for a $ 25,000 loan with a fixed interest rate of around 4% and used the money to purchase a 2000 Corvette.

“It was a very comfortable and easy transaction,” he says.

Borrowers with strong credit can save thousands of dollars in interest charges over time. Overall, personal loans can still carry high interest rates, with the average rate being 10.82% as of October 8, according to Bankrate.com, a loan comparison website.

But the rates can be much lower for customers that lenders consider more trustworthy. LightStream, for example, charges from 1.99% to 9.99%, depending on the credit of the applicants and what they intend to use the loans for, among other factors. The lender’s lowest personal loan rate to finance a new car is 1.99%, while the lowest rate for home improvements is 4.99%.

Borrowers with pristine credit can get interest rates up to 5.99% from the First National Bank of Omaha, a unit of

First National of Nebraska

; 6.75% from

Wells Fargo

; and 6.99% from

Learn about financial services.

(With some lenders, rates may vary based on applicants’ location, regardless of whether they have an existing relationship with the lender or other circumstances.)

By comparison, the average credit card interest rate was 11.82% in August, according to the latest Federal Reserve data. Even high-credit cardholders will have a hard time getting an interest rate of less than 9%, excluding promotional rates that last for a limited time.

Paying a credit card balance of $ 10,000 with 11.82% interest over three years would cost a borrower $ 1,936. Total interest charges on the same balance at 6.75% interest on a personal loan would be $ 1,075.

Unlike credit cards, borrowers taking out personal loans typically don’t have to worry about the interest rate hike because personal loan rates are usually fixed. But it is worth comparing the rates offered by different lenders. Websites such as LendingTree.com and Bankrate.com allow potential borrowers to compare options, and borrowers should also check with lenders who may not be listed on those sites.

Many lenders also do not charge borrowers fees for taking out personal loans or transferring a credit card balance into a personal loan. Consumers can transfer credit card balances to another credit card that doesn’t charge interest for a limited time, but such transactions typically involve paying a balance transfer fee which is often around 3% of the balance transferred.

A personal loan can also make a borrower more attractive to other lenders. By shifting credit card debt into a personal loan, borrowers’ so-called credit utilization ratio – their credit card balances versus total credit card limits – will shrink and thus help improve their credit score. says John Ulzheimer, president of consumer education at CreditSesame.com, a credit management website.

However, personal loans have some potential drawbacks. As with any loan, lenders can refer borrowers to credit reporting companies if they are overdue on payments by at least 30 days, which often leads to the borrower getting a lower credit score. The information also remains on a borrower’s credit report for seven years, which could make it more difficult to obtain other loans and favorable interest rates.

Borrowers can get better deals in many cases on collateralised loans. The average interest rate on fixed-rate home loans, for example, was 6.26% in September, according to the mortgage information website HSH.com. Major borrowers can also get a lower interest rate on auto loans, starting at 0% through the carmakers’ tied loan arms, compared to a personal loan in many cases.

Furthermore, borrowers with even minor credit problems should think twice before signing up for a personal loan as they may end up paying much higher interest rates than other loans. For subprime borrowers, for example, interest rates on personal loans from large lenders can be as high as around 35%.

Write to AnnaMaria Andriotis at [email protected]

Copyright © 2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8


Source link

Previous

Assure Holdings schedules Q2 2020 conference call for Friday, August 28, 2020, at 11am ET

Next

2 lawsuits towards TCF Monetary for the Huntington merger `` voluntarily dismissed ''

Check Also