Personal loans are on the rise, reaching levels not seen since the Great Recession. Between 2017 and 2018 alone, personal loans grew by 15%, according to data from Equifax.
The average loan balance ranged between just over $11,000 to around $19,500, depending on the borrower's credit score, according to LendingTree's December Personal Loan Report.
Some of this explosive growth can be attributed to the proliferation of financial apps — including SoFi, Payoff and others — that make applying for and securing a personal loan a relatively seamless process. These FinTech loans accounted for 38% of all unsecured personal loan balances at the end of 2018, according to a report from TransUnion. In 2013, FinTech loans comprised just 5% of all personal loans.
These loans, which are unsecured debts with a typical term of three to five years, are touted as a smart way to consolidate debt or refinance a credit card with a high interest rate. While that can be true, you need to be careful about how much you're taking on and for what reason, as with all debt. Here's when it makes sense.
Consolidate debt at a lower interest rate
Debt consolidation is the No. 1 reason borrowers are interested in personal loans, according to LendingTree. That could be a savvy financial move under the right conditions.
If you have a decent credit score, you may be able to get a personal loan with a relatively low interest rate. The average APR offered to borrowers with credit scores above 760 is just over 10%, according to LendingTree. That's significantly less than the average credit card APR of 17.3%. Even a few percentage points difference can save you big over the life of the loan.
If you get a loan with a lower rate than your credit cards, you can pay off the balances with the personal loan, and save money on interest as you repay that debt.
Personal loans offer lower rates on average than credit cards (though this isn't always the case), and the difference between the two has grown increasingly wide over the past two decades.
Regardless of your credit, it's important to shop around, Kali McFadden, LendingTree's research manager, tells CNBC Make It. That's because the interest rate you're offered will vary widely by lender, which could turn into thousands of dollars over the life of the loan, she says. The higher your credit score, the wider the range of interest rates offered tends to be.
"You can absolutely expect to get a better deal depending on where you go," says McFadden. "If you have a working relationship with a financial institution and trust them, that's good, but you should still shop around and negotiate the rate if they want to keep you with as a customer."
Or, if your rate seems high, she suggests showing the bank LendingTree's report and asking for the average. You can use similar reports from other financial sites, such as Bankrate, as well.
Whether you're using an app to apply for a loan or going to a brick and mortar bank, pay close attention to the terms, especially the interest rate and fees. A prepayment penalty might apply, for example, if you pay off your loan early. Be sure to read the fine print. Origination fees can cost anywhere from 1% to 8% of the loan amount.
Consider a balance-transfer
If you have a high credit score and are considering a personal loan to consolidate debt, McFadden says it's smart to consider a 0% APR balance-transfer credit card instead. Just make sure you can afford the payments and won't fall back on old spending habits.
"If you're going to pay down your credit card and then run up your credit card again, then you have twice the debt," says McFadden.
While it's smart to consolidate debt, McFadden says not to use a 0% card or personal loan as an excuse to spend more.
"I would never recommend that someone take on a debt product for a luxury item, but if someone is dead set on putting a vacation on a credit card, putting that on a personal loan is a better bet," she says. "Always be careful when taking out a loan."
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