Just when you thought today’s younger generation couldn’t take on any more financial pressure, a new form of debt is on the rise. Whether it’s to pay for moving costs or an upcoming wedding, personal loans are becoming an increasingly popular course of action for millennials.
In fact, according to a recent CNBC article, those 35 and under account for 25 percent of personal loans, more than double the amount in 2015, says personal loan provider LendingPoint, based on an analysis of borrower data from 2015 through August 2018.
Millennials aren’t the only ones dipping into personal loans. TransUnion reports that outstanding personal loan balances hit a high of $125.4 billion in the second quarter of 2018, up 17.5 percent from the same period one year ago.
What’s driving the move? For one thing, interest rates as low as 3 percent for those who qualify, compared to average credit card rates, which exceed 17 percent. This is making personal loans an attractive option for those who can get them at a low rate to consolidate and pay off higher-rate debt.
As with any borrowing scenario, personal loans can be a smart option when used wisely. CNBC offers the following common-sense precautions:
Borrow what you can afford to repay. Sounds obvious, but understand what this really means. Your monthly housing costs and debt payments should not exceed 36 percent of your gross monthly income.
Borrow for the right reasons. Taking out a lower interest-rate personal loan to pay off higher interest-rate credit card debt makes sense… but only if you stop using those credit cards. And if you’re taking out a loan to pay for a wedding or another large expenditure, perhaps a better option is to delay the expense until you have the money saved.
Know your fees. While finding the best rate will be your priority, don’t forget to read the fine print to avoid surprise expenses, such as origination fees and prepayment penalties.
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