This Was the Average Personal Loan Balance
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When you have a need to borrow money, you may be inclined to turn to a personal loan. The great thing about these loans is that they allow you to borrow money for any purpose -- whereas with a mortgage loan, for example, you can only use the proceeds to finance the purchase of a home.
Personal loans can also be a relatively affordable way to borrow money. Granted, these days, pretty much any type of borrowing you do is apt to be pretty expensive because interest rates are up across the board. But you'll likely pay a much lower interest rate on a personal loan balance than you will for, say, a credit card balance.
Meanwhile, data from Experian shows that U.S. personal loan balances rose substantially compared to the year prior. And the average personal loan balance last year came to $18,255. But that's not really a good thing.
A trap that's easy to fall into
The fact that personal loans are convenient, flexible, and affordable is both a positive and a negative. On the one hand, it's good to have options when it comes to financing a random purchase that may not fall into its own borrowing category, like a home or car does. On the other hand, some consumers risk falling into the trap of borrowing freely with a personal loan -- and paying the price afterward.
In 2023, total personal loan balances rose by 19.1% compared to 2022. And while we can potentially point to inflation as a factor that caused those loan balances to rise, it's probably not the only thing that prompted consumers to borrow more.
It may be that consumers are growing increasingly comfortable with personal loans. But because of that, they risk taking on higher balances and paying more interest on their debt.
Remember, personal loans might come with lower interest rates than other borrowing options. But you'll still paysome amount of interest, and it may not be a small amount if you're taking on a larger balance.
Also remember that if you fall behind on a personal loan, you'll risk damaging your credit score. That could make it very difficult to borrow money the next time you need to.
Be careful when signing a personal loan
You may be looking to take out a personal loan so you can fix up your home, start a business, go back to school, or do something else that might greatly improve your quality of life or set you up to earn an income. But be careful not to take out a personal loan for non-essential purposes.
It's tempting to sign a personal loan when you can use your proceeds for anything you want. But if the something you want to finance is a vacation, for example, that's really not a good reason to be borrowing money.
Personal loan debt is just that -- debt. So if you're going to take it on, make sure you're prepared, and do your best not to get in over your head.
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