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Americans increasingly turning to personal loans to consolidate debts

Americans increasingly turning to personal loans to consolidate debts
(Image credit: Getty Images)

Hard-pressed Americans are increasingly seeking out personal loans online (opens in new tab) to consolidate their debts. The havoc wreaked on household finances by the coronavirus pandemic has also resulted in a growing number of people turning to the best personal loans as a means to cover emergency expenses, according to a new study (opens in new tab) from Bankrate. 

Analysis of more than 160,000 personal loan applications in the first quarter of 2020 found that 38% of potential borrowers were looking for a personal loan for the purpose of debt consolidation, while 23% intended to use the funds raised for financial emergencies. 

With more 22 million Americans being put out of work by the COVID-19 outbreak, the results hardly come as a surprise, particularly after recent research by Pew suggested that around three-quarters of lower-income families will exhaust their rainy day funds within three months (opens in new tab).

According to the new analysis, around two-thirds of borrowers applying for pre-qualification were wanting a personal loan of between $2,000 and $25,000, with emergency expenses requiring the smallest loans and debt consolidation requiring the largest. While just 14% of applicants wanted loans larger than $25,000, it is likely that the number will grow the longer businesses are forced to remain closed. 

Is now a good time to get a personal loan?

For Americans searching for the best personal loans online, now could be both a good and a bad time to apply. On the one hand, many banks have been modifying their personal loan options to help people keep on top of their finances, responding to the plea of the Federal Reserve and other agencies in mid-March to “offer responsible small-dollar loans to consumers and small businesses in response to COVID-19.”

Americans increasingly turning to personal loans to consolidate debts

(Image credit: Getty Images)

According to Bankrate, the national average rate on personal loans for the week of April 22 was 11.23%, compared with the average variable credit card interest rate of 16.46%. However, hone down to the best personal loans and rates of around 5.99% can be found. 

Unfortunately, at the same time as many lenders have been announcing new offers with lower interest rates, in many cases the qualification requirements to be eligible for personal loans have been getting stricter too. The major problem is that it will likely be those with the lowest credit scores that find it the hardest to secure the lowest rates on a personal loan. 

What should I do if I am struggling to get a personal loan?

As it is essential to secure the very best loan arrangement that you can, the key will be to shop around for the best personal loans online. In the first instance, it could be worth approaching the best credit report services (opens in new tab) to see where you stand credit-wise. If the news isn’t great, then you could look to enlist the help of one of the top credit repair services (opens in new tab) if you can - it’s definitely something to explore as the best interest rates go to people with good credit. 

If you are still unsuccessful in the pursuit of a personal loan, the best credit cards (opens in new tab) might be able to provide some financial relief, particularly if your debts aren’t that big. Definitely find out how a balance transfer credit card can help (opens in new tab) if your outstanding debt is on a credit card already. 

That said, if you feel you are about to completely buckle under the strain of debt, the best debt consolidation companies (opens in new tab) might be your only option.   

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With over 20 years’ experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors.