Not long ago, the personal loan was considered by most people to be a last-ditch solution to pressing money issues. Now, it is the fastest-growing form of consumer lending in the United States, growing 19.2% in Q1 2019 year-over-year, according to a recent Transunion consumer credit report.

What accounts for the rapid rise in popularity of the personal loan market, a once secondary component of the consumer credit industry? Do Americans just love to take on debt, or is there another explanation? Let’s examine the numbers behind personal loans while tackling the question of how they became so prominent.

The personal loan boom

For those that don’t know, a personal loan is a type of short term unsecured loan ranging anywhere from $100 to $100,000 (typically around $8,000) with fixed or variable interest rates that consumers can use to buy expensive things or consolidate debt.

The stats don’t lie, these loans are having a moment: personal loan balances have almost doubled in just four years, climbing from $72 billion in 2015 to $143 billion at the beginning of this year. They’ve become mainstream: used by people of all income brackets, ethnic backgrounds, and regions of the country for a variety of purposes (Source).

In light of their skyrocketing growth and increasing prevalence, is there reason to believe that personal loans are a bubble waiting to burst? Unlikely, as borrowers’ ability to pay loans back on time has increased along with the volume of loans taken out.

Key facts

  • Total outstanding personal loan debt in the United States is $143 billion.
  • There are 21.1 million outstanding personal loans in the U.S.
  • APRs varies considerably depending on the borrower’s credit score: ranging from an average of 7.25% for a 720+ score to over 100% for those with sub – 600 scores.
  • 19.1 million consumers currently have an unsecured personal loan, compared to the 176 million Americans with credit cards.
  • In total, personal loans amount to less than 1% of total consumer debt, a fraction of credit card debt’s 7.27% share.
  • The average debt per borrower is $8,402.
  • The average delinquency rate for personal loans in Q4 2019 was 3.39%.
  • Loan originations increased by 9.7% year-over-year in Q4 2018.

Sources: Transunion, Federal Reserve

Explaining the industry’s growth

The reason for the personal loan boom is simple: they are more accessible than ever before, thanks to Fintechs.

In the past, one had to visit a bank in the flesh and speak to another human being in order to secure a loan, but now consumers can complete the whole application process in minutes from behind a laptop or phone screen.

Marshalling in this development are Fintechs, non-traditional lenders that utilize a technological, data-driven approach to delivering financial services. The emergence of Fintechs in the past decade has bolstered the rise in popularity of personal loans, as they are fast becoming consumers’ preferred means of acquiring them.

By Q4 2018, FinTech loans accounted for 38% of outstanding loan balances, compared to a mere 5% five years prior. Consumers love having the ability to visit the website of a Fintech and get accepted for a loan with individually tailored interest rates and repayment terms issued coldly by an algorithm in the fraction of the time it would take with a traditional finance company (Source).

Why do Americans take out personal loans?

Another reason behind the personal loan’s recent popularity bump is its flexibility: borrowers can use one for just about anything, from buying a boat to financing their honeymoon.

However, a survey taken by LendingTree of its customers found that 61% plan to use a personal loan to pay off other debts, broken down into 21.8% using it for credit card refinancing and 39.2% putting it toward general debt consolidation. Let’s take a look at the reasons given by LendingTree customers in order of frequency:

  • Debt consolidation: 39.2%
  • Credit card refinance: 21.8%
  • Other: 14.6%
  • Home improvement: 7.7%  
  • Major purchase: 3.5%
  • Medical bills: 3.0%
  • Moving and relocation: 2.7%
  • Vacation: 2.3%
  • Car financing: 1.7%
  • Wedding expenses: 1.5%
  • Business: 1.0%
  • Homebuying: 0.7%
  • Green loan: 0.3%

Glancing at the survey’s findings, it’s easy to conclude that personal loans have caught on as a simple and effective means of consolidating or paying off debt, while the variety of responses and the popularity of the survey’s “Other” option speak to their flexibility.

Source: LendingTree

Which age group takes out the biggest loans?

According to data compiled by TransUnion, the answer is Gen X’ers, who recorded an average loan balance of $9,522. Let’s look at the average size of personal loan amounts by generation, from highest to lowest.

  1. Gen X (1965-1979): $9,722
  2. Baby Boomers (1946-1964): $8,530
  3. Millennials (1980-1994): $7,374
  4. Silent (Until 1945): $6,941
  5. Gen Z (1995 – present): $3,340

With the middle age bracket responsible for the highest balances, no clear pattern emerges from the data. However, if you were to rank the generations in terms of delinquency rates, they’d descend linearly from youngest to oldest, with Gen Z notching 6.0%, down to the Silent Generation’s 2.5%. A fine example of personal responsibility increasing linearly with age.

Personal loan borrower statistics

  • Gen X posted the highest average loan balance: $9,722.
  • Gen Z’s 6% delinquency rate is the highest among all age groups.
  • Washington State has the highest average loan balance, with $27,295, followed by #2 South Dakota ($26,597), and #3 Oregon ($26,527).
  • Hawaii boasts the lowest average personal loan balance, at $12,638 trailed by #2 District of Columbia ($13,261), and Kentucky ($13,817).
  • New Mexico’s average of 1.7 personal loans per person leads all other states.
  • The average credit score for an approved personal loan application is 741.

Sources: Experian, LendingTree

Comparing personal loans with other forms of consumer debt

Discussion of the accelerating popularity of personal loans must be tempered with the caveat that it still accounts for a rather low percentage of U.S. consumer debt — a mere 0.9% according to Federal Reserve and LendingTree data. Mortgage debt accounts for an overwhelming 72.8% share of total consumer debt, with other types trailing far behind.

Of the five major types of consumer debt, personal loans will likely continue to hold the smallest share of consumer debt for the foreseeable future. Credit cards, which hold the second smallest share at 7.2%, are far more widely used than personal loans. They give the consumer the ability to take on as much or as little debt as they want and make small purchases, while personal loans are more suited towards a large purchase that will take over a year to pay off.

Delinquency rates

Personal loans’ Q4 2019 delinquency rate of 3.39% is a 1.4% improvement over the 4.78% rate of exactly ten years prior. Over the past few years, the delinquency rate has hung around the 3-4% range, despite the marked increase in the number of personal loans taken out.

Compared to the rates of the three other main forms of consumer debt, personal loan delinquency rates are the highest, over twice that of auto loans (1.44%) and mortgages (1.45%).

Source: TransUnion

Summary

As we’ve seen by examining the statistics, the popularity of personal loans has risen sharply in the past decade thanks to 1) Fintech lenders streamlining the application process, making them more accessible to the average American and 2) the special niche they fill in the consumer debt industry that nobody knew was lacking.

TransUnion predicts that total personal loan balances will hit 156.3 billion by the end of 2019, which is a reasonable estimate, given that they’ve risen in successive quarters for years.

However, there’s a ceiling on how long personal loan growth will continue before stagnating. The presence of other forms of consumer loans well-suited to their specific purpose means that personal loans will always have something of a “wild card” status in the consumer loan world. Still, if you need to buy a grand piano within the next week, taking out a personal loan is likely the way to go.