If you’re planning to wipe out a credit card balance with a personal loan this fall, you’re going to get a yes. Check the number attached to it before you celebrate, because the yes is getting smaller.
Lenders wrote 6.4 million new unsecured personal loans in the second quarter, up 19.5% from a year earlier. Total personal loan balances reached $281 billion. That’s a record, and it came out in TransUnion’s quarterly credit report on August 6.
Here’s the part the headline number hides. The count of open loans grew 10.7% over the year. The dollars grew 9.6%. Loans multiplying faster than balances is another way of saying the average loan got smaller.
TransUnion says it out loud. Josh Turnbull, its senior vice president of consumer lending: “Lenders are reaching more consumers than ever, particularly at the subprime end, but they are doing it with smaller loan sizes and tighter underwriting.”
Translation: the approval got easier and the check got thinner.
That combination is fine if you’re replacing a water heater. It’s a trap if you’re consolidating, and consolidating is what most of you are doing. LendingTree puts it at 53.1% of personal loan borrowers taking the loan to pay off or refinance credit cards.
Say you owe $9,000 across two cards at 24%. You apply for $9,000 and the lender comes back with $6,000. Take it, clear the bigger card, and now you have a fixed loan payment every month plus the balance still sitting on card two. You also have an empty credit line on the card you just paid off.
You now hold three payments where you meant to hold one, plus an open card you can run right back up. That’s the trap.
So do this before you accept anything. Call each card and get the payoff quote, not the statement balance. Then hold it against the amount the lender approved, not the amount you applied for.
If the approval doesn’t cover the payoffs, you have two honest options. Turn it down and attack the highest-rate card directly. Or take it, clear one card completely, and freeze that card the same day. Freeze, not close. The open credit line helps your utilization ratio. The card in your wallet does not.
Ask what funds, too. When a personal loan carries an origination fee, the fee comes out of the proceeds, so the money that lands in your account is smaller than the loan you repay. The approved amount and the deposited amount are not the same number.
One more thing worth knowing about the crowd you’re joining. TransUnion has 3.81% of personal loan borrowers 60 or more days behind, and the average borrower now owes $11,694 on personal loans alone, on top of $6,610 in card debt. The lenders opening the door wider can see that back end better than you can.
The loan calculator will run the total interest on a partial consolidation against paying the cards down directly. Run both before you decide. Our loans hub covers the terms that matter, and what we rank is where to start shopping.
Get the payoff quotes first. Nobody at the lender is going to point out that their number doesn’t cover yours.
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