Personal loans help some get by day to day

  • About a third of consumers seeking a loan do it to cover household expenses.
  • Lenders don't necessarily approve all those loans; the most commonly approved loans are for debt consolidation.

With consumer debt at a record high, it might be easy to assume people are overextending themselves by taking lavish vacations or even too many trips to the local coffee spot.

Yet a new study shows that the top reason people apply for personal loans is a bit more mundane, if not alarming: to cover daily living costs.

About a third of applicants (34 percent) seeking one of these loans cite household expenses as the reason for needing to borrow, according to the SuperMoney study.

"It's not really a good reason to apply for one of these loans, but there are a lot of people scraping by day to day, and they use the loan as a cushion," said Miron Lulic, founder and CEO of SuperMoney. (Click on graphic to expand.)

The second-most common reason given is debt consolidation (23 percent), followed by other (16 percent), moving (9.1 percent) and medical (7.8 percent).

Total household debt reached $12.84 trillion as of June 30, according to data from the Federal Reserve of New York. That's $164 billion higher than the peak of $12.68 trillion in the third quarter of 2008 as the economy headed into the Great Recession.

While personal loans are a tiny fraction of that outstanding debt at $106 billion, according to recent data from TransUnion, it's more than double the $45 billion of five years ago.

In recent years, many online lenders, like Lending Club and Prosper, have emerged to offer personal loans with competitive interest rates and quick approval. These loans are unsecured, which means there's no collateral like a house or car that the lender can come after if you default.

Depending on your credit score, personal loans can come with lower interest rates than is typical with credit cards. The range for interest rates on personal loans is about 3 percent to more than 30 percent, with the best rates typically reserved for those with excellent credit, according to ValuePenguin. In comparison, the average interest rate on credit cards is about 16 percent.

Credit Score
Average Personal Loan APRs
Excellent (720 - 850) 10.3% - 12.5%
Good (680 - 719) 13.5% - 15.5%
Average (640 - 679) 17.8% - 19.9%
Poor (300 - 639) 28.5% - 32.0%

Source: ValuePenguin

Yet for people with average to poor credit, the rate on a personal loan typically ranges from 17.8 percent to 32 percent.

"For those consumers, it's an expensive form of credit," Lulic said. "If you face a financial emergency and have to borrow, get it paid off as fast as possible, especially if it's a high-interest loan."

While household expenses is the most common reason for applying, not all of those requests are approved. The most common reason loans were approved is for debt consolidation, the SuperMoney study showed.

Often, that involves credit card debt. This makes it important to prevent running up those cards again after you shift the balance to a loan.

"I'd hide the cards," Lulic said, noting that simply closing the accounts can reduce your credit score.

That is because lenders evaluate your credit-worthiness partly on how much credit you are using versus how much you have available to you. The less credit you have available compared to what you're using, the more it's held against you on your credit report.

Lulic also said that if you have good credit, you might get a better deal with a credit card that charges you no interest on balance transfers for a certain amount of time. Yet those deals typically come with a balance-transfer fee, so make sure the amount you pay up front won't cancel out the benefit.

Additionally, the Consumer Financial Protection Bureau warns consumers to transfer student loan debt cautiously.

"You can get wildly different rates from different lenders, so make sure you compare your options." -Miron Lulic, Founder and CEO of SuperMoney

If you have a federal student loan and would be eligible to participate in a loan forgiveness program (certain public service or teaching positions qualify), you will lose that eligibility if you refinance that debt with a personal loan.

Additionally, moving the debt to a loan would mean that if you run into financial trouble, you will lose your rights to federal options for repayments, which could include income-driven repayment plans or other arrangements.

If you determine that a personal loan is right for you, Lulic advises that you shop around.

"You can get wildly different rates from different lenders, so make sure you compare your options," he said.