Personal Loans Improved Over 60% Of Borrowers’ Finances, Forbes Advisor Survey Finds – Forbes Advisor

Personal loans can be an impactful tool on an individual’s financial journey. Whether it’s consolidating high-interest debt, financing a wedding or paying for a home-improvement project, personal loans can help borrowers achieve their financial goals.

Yet, they aren’t without their potential downsides. Personal loans can have wide-ranging effects if they aren’t properly managed, and they can quickly become unaffordable.

Recognizing the two sides of personal loans and how personal loan debt can impact individuals, Forbes Advisor surveyed 2,000 borrowers on their experience using personal loans. The results shed light on why people take on this debt and how it impacted their financial situation.

People Are Using Personal Loans Despite High Interest Rates

Since March 2022, the Federal Reserve has increased the federal funds rate target 11 times, which has pushed the interest rates on consumer products, like personal loans, higher. The average 24-month personal loan interest rate was 8.73% in the second quarter of 2022 and increased to 12.17% in August 2023.^{[ ]}

But climbing interest rates didn’t deter borrowers. More than one-third of survey respondents said they took out their most recent personal loan after March 2022. On top of that, 75% of participants also said they’d consider taking out a personal loan again with current interest rates.

When asked what financial alternatives borrowers considered before applying for a personal loan, 59% said credit cards, 58% said cash advances and 54% said borrowing money from family or friends.

Most Consumers Shop Around Before Taking Out a Personal Loan

Loan shopping before borrowing is common: 76% of consumers said they compared interest rates and fees from different lenders before choosing a loan. Only 22% reported not comparing offers before choosing a loan.^{[ ]}

For those who compared lenders, 54% compared at least three before making a decision and 23% said they compared four lenders.

Of the respondents who didn’t compare lenders, more than half got a lender recommendation from friends or family. Another 45% didn’t compare lenders because it was too time-consuming or inconvenient, and 39% didn’t compare options because they received a loan offer in the mail.

Personal Loans Help People Address Important Financial Needs

Personal loans are installment loans that can be used to cover almost any type of legal personal expense, from paying moving costs to financing adoption. Those surveyed reported using loan funds for a wide range of expenses, both essential and nonessential.

Borrowers took out a personal loan to handle medical bills, pay for home improvement projects and consolidate debt—each of which 15% of respondents reported as the reason they took out their loan. Another 13% of borrowers used money for vacations, 12% for unexpected expenses and 11% for a major purchase.^{[ ]}

Seventy-one percent said they used all of the personal loan funds for one reason, while 26% said they did not. And a significant number of borrowers used loan funds in unplanned ways. About one-third of survey respondents said they only used 21% to 30% of their personal loan for its initial purpose, with a majority of the money going elsewhere.

Average Personal Loan Amounts

Most borrowers, about three in four respondents, borrowed $10,000 or more for their most recent personal loan. Thirty-five percent borrowed between $10,001 to $15,000, while 42% borrowed over $15,000. Small loans were less common: 23% said they borrowed $10,000 or less.

Personal loan balances vary based on where someone is at in life, and who they are. Baby Boomers, born between 1946 and 1964, had highest personal loan balances with $20,370, followed by Gen-X with $18,922, born between 1965 and 1980. Beyond that, on average, men carry 20% more personal loan debt than women.^{[ ]}

Many Borrowers Report Missing Payments or Defaulting On a Personal Loan

Managing payments proved to be difficult for many of those with a personal loan, the survey found. From missing payments to defaulting, personal loans often proved to be more of a burden than an asset.^{[ ]}

The Forbes Advisor study found many borrowers had trouble keeping loans in good standing. More than half of survey participants said they’d missed a personal loan payment. Traveling, forgetting a loan payment and not having enough money to pay are the most commonly cited reasons for missed payments.

Defaulting, or when a borrower is late by over 90 days on loan payments, was also common. Just over 57% of respondents said they have defaulted on a personal loan before. Defaulting on a personal loan can have wide-ranging consequences, including damaging your credit score, wage garnishment and your lender placing a lien on your home.

Borrowers cited a wide range of reasons why they’ve defaulted on personal loans, including forgetting to make payments, having another unexpected expense or losing their source of income.

The Impact of Personal Loans on Finances is Usually Positive

Nearly two-thirds of borrowers who took out a personal loan said it made their financial situation better, even though many respondents reported missing payments and defaulting on loans.^{[ ]}

Just over 20% of consumers said taking out a personal loan didn’t change their financial situation, and 14% said it worsened their financial situation.

How Personal Loans Help Finances

Personal loans aren’t without their risks, but they can help improve finances. Seventy-six percent of respondents said a personal loan made their financial situation better by giving them additional funds and 61% said it helped them pay off debt faster.

Another 57% said that personal loans helped improve their credit score, and 52% said it helped them cover basic expenses. Just less than half of respondents said their personal loan helped them get caught up on overdue bills.

How Personal Loans Hurt Finances

In some cases, personal loans did harm borrower’s finances, including 54% who said their personal loan negatively impacted their credit score. Beyond that, 53% said they had to pay fees to get the loan.

Another 46% said their APR on the loan was too high and 45% didn’t get the loan amount necessary to pay for what they needed. Finally, 31% of participants said borrowing made them accumulate more debt than necessary.

Consumers Believe There’s Room for Improvement in the Personal Loan Approval Process

Prospective borrowers can typically apply for personal loans online, with quick applications and fast funding, but eligibility conditions are a sticking point for borrowers. All 2,000 survey participants thought financial institutions should make qualifying for a personal loan easier.^{[ ]}

Should You Get a Personal Loan?

If you have good credit—at least 670 on the FICO Score scale—personal loans can be an affordable way to consolidate debt and finance big purchases. However, there are some drawbacks to personal loans.

One drawback is loans can have upfront fees of 1% to 8% or higher. Loans can also tie you into a repayment commitment that lasts 12 to 60 months and missing payments on a personal loan can negatively affect your credit.

Borrowing money shouldn’t be taken lightly. Look to personal loans when it’s necessary to cover your expenses and when you have a stable source of income to keep up with payments. Before borrowing a personal loan, consider taking these steps:

1. Estimate how much you need. Think about your financial goals before choosing a loan amount. For instance, if you want to use a personal loan to consolidate high-interest credit card debt, add up your balances on each card first so you can borrow what you need to consolidate and nothing more.
2. Avoid overborrowing. You might get approved for a loan amount that’s higher than what you need, but it’s always best to only borrow what’s essential to meet your goal. Otherwise, you could end up with unnecessary debt that’s difficult to repay.
3. Improve your credit. Borrowers with strong credit typically qualify for the best personal loans with the most affordable payments, especially now when interest rates are high. Consider taking steps to improve your credit before borrowing to help lower the cost of a personal loan.
4. Look for a co-signer or co-borrower. If you can’t improve your credit before borrowing, consider adding a co-signer to the loan or applying for a loan jointly with a co-borrower with good credit.
5. Consider a short-term loan. Long loan terms can be appealing because extending repayment can lower your monthly payments, but this often means you’ll pay more in interest. While short-term loans can have higher monthly payments, you’ll typically save money on interest charges.

How To Manage Your Personal Loan

After taking out a personal loan, there are a handful of ways that you can effectively manage your debt:

• Create a budget. Keep a spreadsheet that lists your monthly income and living expenses, including your debt payments. Tracking expenses and budgeting for loan payments each month can help ensure you set money aside for debt payoff.
• Sign up for autopay. Some lenders offer interest rate discounts when you sign up to make automatic loan payments from your bank account, which can save you some money and ensure payments are made on time.
• Make extra payments when you can. Paying extra each month when you can and directing that money toward the loan principal can pay off your loan faster.
• Contact the lender if you have trouble paying. Lenders may offer payment relief options like payment deferments if you experience financial hardship, so don’t suffer in silence. Setting up a payment arrangement could be a way to pause payments without destroying your credit.

Methodology

This online survey of 2,000 U.S. adults who have used a personal loan was commissioned by Forbes Advisor and conducted by market research company OnePoll, in accordance with the Market Research Society’s code of conduct. Data was collected from Sept. 12 to Sept. 17, 2023. The margin of error is +/- 2.2 points with 95% confidence. This survey was overseen by the OnePoll research team, which is a member of the MRS and has corporate membership with the American Association for Public Opinion Research (AAPOR).