Are Personal Loans the New Credit Cards?

In the wake of the recession, America seems to have partially kicked its addiction to credit card debt. According to the Federal Reserve’s quarterly consumer credit report, American consumers have seen a massive net reduction in their holdings of revolving debt, a category comprised almost entirely of outstanding credit card balances. After reaching $1.01 trillion in 2008, the amount of revolving debt has now fallen to roughly $865 billion.

Have Americans resolved to stop spending money they don’t have? Not quite. While this new-found responsibility is at least somewhat attributable to economic uncertainty, it’s worth noting that we’ve also been borrowing more through other channels. Even as revolving debt was falling by $145 billion, nonrevolving debt — that is, loans with fixed terms and amounts — grew by $175 billion over the same period.

And one particular type of loan seems to be on the rise: Personal unsecured loans. Unlike home equity loans, these small loans (some lenders will let you borrow as little as a few thousand dollars) aren’t secured by any of the borrower’s property, and as such are offered mainly to prime borrowers. They also tend to have higher rates, usually in the 10%-20% range depending on your credit score.

How popular are they becoming? Wells Fargo, for instance, says that new originations of personal loans and lines of credit have doubled in the last year. And we’re also seeing more non-bank institutions offering the products.

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