In these uncertain financial times, more Americans than ever are turning to personal loans to stem the tide. According to the latest industry data, nearly 23 million Americans owe a collective $232 billion in personal loans, a 21.5 percent jump from last year’s total of $191 billion. Just six years ago in 2017, Americans owed $117 billion in personal loans.
The average balance of a new personal loan was just over $8,000 as of the fourth quarter of 2022. The previous year, the average balance was $7,104. More than half of borrowers take out a personal loan to consolidate debt or refinance credit cards. About eight percent borrow to make home improvements. An estimated 3.62 percent of personal loan accounts are 60 days or more past due in the second quarter of 2023.
Inflation is partially to blame. With the cost of living reaching never before seen heights, more people are turning to borrowing to cover regular everyday expenses. But financial technology (fintech) lenders have made it easier than ever to obtain a personal loan, and often for greater amounts than what banks and credit unions traditionally provide. Companies like SoFi or CreditNinja lure customers with offers online that emphasize the speed and ease of applying for large loans.
The average personal loan rate for a 24-month loan at a commercial bank was 11.31 percent as of early September. Interest rates are still expected to keep rising, though it is possible to find personal loans with interest rates at 6.99 percent. The best personal loan rates are reserved for borrowers with excellent credit. Currently, average personal loan rates range from 10.73 percent for borrowers with excellent credit to a whopping 32 percent for borrowers at the bottom of the poor credit scale.
Lending experts and the personal finance industry at large do not see Americans’ increased reliance on personal loans as a major economic threat, at least not an imminent one. Personal loans still make up a relatively small portion of the total U.S. household debt, which topped $12 trillion this year. The most recent forecast from Goldman Sachs places the probability of a recession happening in the next year at 20 percent.
Illinois consumer loan borrowers are protected from marginal lending activities by the Predatory Loan Prevention Act (815 ILCS 123), enacted in January 2021. This relatively new Illinois law was enacted by the Illinois General Assembly as PA 101-658, which was approved by both sides of the aisle in the Illinois House as SB 1792. Under this new Act, the Illinois Department of Professional and Financial Regulation (DFPR) has the power to cap the interest rates charged by consumer lenders and to regulate lending on other ways to protect consumers. DFPR has released a Frequently Asked Questions (FAQ) information sheet on the new Act.