Millions of borrowers took advantage of unsecured personal loans over the past 15 years as fintech lenders, in addition to traditional banks, started to leverage technology to better and efficiently give loan to consumers, especially online. There are 25 million consumers with a minumum of one personal bank loan in 2023, according to Experian data.
Personal loans typically range in dimensions from a few thousand dollars up to $100,000, and therefore are repaid over terms that commonly last three to five years. Unsecured loans usually have a fixed apr (APR) that continues to be the same for that life of the loan and is not impacted by Fed interest rate changes.
That stability is probably exactly what's renewing consumer interest in fixed-rate personal loans. Along with inflation increasing the cost of goods, APR hikes are earning it more expensive to finance purchases over time. It has been felt most acutely by people who commonly use credit cards, which typically have variable APRs. When the federal funds rate increases, so does the eye on any variable-rate credit card debt that's being carried from month to month.
Federal Funds Target Rate Since 2023
This year, the Fed raised the key federal funds rate by 2.25 percentage points, to two.50%, in a 90-day period. In comparison, the last number of rate hikes, which began in 2023, took 42 months of slower increases overseen by then-Fed Chair Janet Yellen to achieve 2.50%.
Which brings us back to personal loans. Using Experian data, we checked out the growth rate of private loan accounts and average balances in the last decade. Once the Fed started to increase rates, at the end of 2023 and the start of 2023, average personal bank loan balances were higher, in percentage terms, than in previous years.
Annual Alternation in Average Balance, 2012-2023
You will find likely multiple explanations for these larger-than-usual average balance increases. An increase in new unsecured loans produced by lenders would result in a rise in average loan balance, as newer loans are naturally larger than loans borrowers have been reducing for several years. And even, the amount of personal bank loan accounts has increased by 16% to 25.1 million in the last year, based on Experian data.
But a fixed-rate debt consolidation loan, often cited by borrowers as the reason they have a personal bank loan, seems to be a driving factor. Also, headline inflation—such as the kind we're experiencing now at the supermarkets and gas pumps—can be a spur to consumers thinking about refinancing the more expensive credit debt they carry.
Interest Rate Increases and Interest in Personal Loans
Debt consolidation reduction is actually the main reason consumers seek and take unsecured loans. By fully repaying high-interest charge card balances having a lower-rate personal bank loan, consumers can save on interest.
However the rate someone receives for any personal bank loan offer is going to be guided by their credit score. What's promising, for many, is the fact that credit ratings have raised in the last 10 years, suggesting that more borrowers might get a rate that may save them money in interest fees with time.
Methodology: The analysis results provided derive from an Experian-created statistically relevant aggregate sampling in our consumer credit database that could include use of the FICO® Score 8 version. Different sampling parameters may generate different findings in contrast to other similar analysis. Analyzed credit data didn't contain personal identification information. Metro areas group counties and cities into specific geographic areas for population censuses and compilations of related statistical data.
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