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Personal loans are surging for the best borrowers

Cash dollars
Akos Stiller | Bloomberg | Getty Images

Ahead of your next big-ticket expense, it may be time to reconsider the personal loan.

Personal loans have increasingly become an attractive option for borrowers with good credit. During the first three quarters of 2015, lenders issued $30.24 billion in personal loans to borrowers with prime and near-prime credit scores, up 67 percent from the same period in 2013, according to an April analysis from credit-reporting company TransUnion. A June survey from Discover Personal Loans estimated that 60 percent of personal loan borrowers had good or excellent financial health.

Borrowers are using the loans for a multitude of reasons. Discover found that a third expected to use a personal loan to buy a car, and 17 percent for medical expenses. Another 11 percent used the funds to consolidate other debts.

"Depending on how much you need and when you need it, taking a personal loan may be advantageous," said Greg McBride, senior analyst for Bankrate.com. "You want to cast a wide net and know what all your options are."

The big potential advantage of a personal loan is the low rate, especially for consumers carrying credit card debt. For example, APRs start at 5.95 percent at SoFi on a three-year, $10,000 loan; 5.99 percent at lenders including Wells Fargo and Lending Club; and 6 percent at Earnest. To compare, the average cash-back credit card carries a rate of nearly 17 percent, according to Bankrate.com, while the "low-interest" cards average 12 percent.

"Generally speaking, you're better off going with the lowest interest rate," said certified financial planner Rick Kahler, founder of Kahler Financial Group in Rapid City, S.D.

A second advantage is speed. Personal loan applicants can often get their cash within 48 hours to 72 hours of applying, versus the month it might take to close on a home equity line of credit or the week it takes to have a new credit card in hand, said McBride.

"That quick turnaround is a compelling advantage," he said.

"You want to make sure that you look at who's backing the loan." -Bruce McClary, the National Foundation for Credit Counseling

But a personal loan isn't a solid win.

Borrowers with good credit likely have options like a zero-percent balance-transfer card, or a Heloc or home equity loan (interest on which may be tax deductible). A $30,000 home equity line of credit runs 4.74 percent, and a home equity loan of the same value, 4.47 percent, according to Bankrate.

Potential borrowers should weigh options from banks and credit unions as well as online lenders. The latter issued $10.14 billion in loans during the first three quarters of 2015, according to TransUnion — $2.93 billion more than banks issued and a 520 percent increase from 2013. But there has been recent upheaval in the industry, with Lending Club subject to woes including regulatory scrutiny and firm Vouch shuttering.

"You want to make sure that you look at who's backing the loan," said Bruce McClary, a spokesman for the National Foundation for Credit Counseling. Check databases including the Better Business Bureau and the Consumer Financial Protection Bureau for ratings and complaints about the lender.

Carefully assess all the terms before applying, said Kahler. Some personal loans offer variable rates, and others do require collateral, potentially putting your car or home at risk if you can't keep up with payments. Many charge up-front fees, and there are caps on how much you can borrow.

Offered terms may also change once the lender has reviewed your credit and verified your income. "Ask yourself, 'What is the actual dollar cost that I'm saving?'" he said.

It's also smart to consider the debt as a warning sign that it's time to reassess your finances, McClary said. Savings rates are low, and many consumers don't have an adequate emergency fund.

"How prepared are you to pay back that loan on schedule or ahead of schedule and still meet other financial obligations?" he said.