Personal loans are an affordable way to borrow money, and during the COVID-19 pandemic, they've no doubt been a lifeline to the millions of Americans grappling with income loss.
The upside of a personal loan is that you're not limited in how you spend it. When you take out a mortgage, you must use that loan to buy a home. With an auto loan, you're financing a car. A personal loan lets you borrow for any reason you want. Credit cards do the same, but personal loans tend to charge much less interest, and don't drop your credit score unless you fall behind on payments.
If you have a personal loan, you may wonder how your balance compares to that of the average borrower. According to new research by The Ascent, the average new personal loan balance is $6,825. But whether your balance is higher, lower, or around that average, it's important to keep up with your payments. If you're concerned about doing so, you're in good company.
Americans worry about repaying personal loans
A good 20% of Americans with personal loans say they're worried about repaying. And falling behind on a personal loan really is bad news. It can really hurt your credit score, and make it harder to borrow money next time you need to.
Of course, a lot of people are taking out personal loans because they're already in a tight financial spot due to the pandemic and recession. According to our research, 16% of Americans plan to apply for personal loans to help pay existing bills.
If you're having a hard time keeping up with personal loan payments, reach out to your loan servicer and ask for help. The Ascent reports that in June, 22% of personal loan holders were given accommodations by their lenders. It pays to make that phone call, discuss your situation, and see what options are available. Your lender might allow you to defer some payments, or reduce your monthly payments until you're in a better place.
Be careful when you apply for a personal loan
If you're thinking of applying for a personal loan, don't get in over your head. Though the average personal loan balance today is $6,825, that doesn't mean you should borrow more than you really need to. Aim to rack up the smallest possible loan balance to make paying it off easier. And, however much you borrow, make sure you can afford the monthly payments you commit to.
Finally, before you apply for a personal loan, it might pay to see if you qualify for a home equity loan or line of credit (HELOC) first. Borrowing against your home is generally more affordable interest rate-wise than taking out a personal loan, and it may be easier to qualify for. If you own your home, you may be able to use it as collateral so there's less risk for your lender. With a personal loan, there's nothing securing the loan, so your credit score and income will be used to determine whether you qualify.
Some lenders are cutting back on home equity loans and HELOCs during the pandemic, and of course many people are not homeowners. A personal loan may be your next best bet.
Our Picks of the Best Personal Loans for 2020
We've vetted the market to bring you our shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on our top picks.The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.