||Personal Loans Make a Comeback
Personal loans fell out of favor during the financial crisis. But they are starting to make a comeback at lenders such as Wells Fargo, Discover Financial Services and TD Bank.
Some borrowers are using personal loans for big-ticket items, such as paying for a wedding or home repairs, or to help children get settled after college. At a time when many people are seeking to pare their debt, a personal loan -- which isn't secured by borrower assets -- can also help borrowers take control of existing debt and pay it off over a fixed term.
The increased interest in personal loans comes as consumers across all income levels are looking to get more disciplined, says Todd Denbo, a senior vice president at Wells Fargo. "They want a known monthly payment and a known light at the end of the tunnel," he says.
Robert Barabani, a 30-year old accountant in Elmwood Park, N.J., is consolidating $15,000 of credit-card debt used to pay for home improvements into a personal loan from Wells Fargo. "We decided to get the charges off higher-interest credit cards and get a longer-term loan with a lower interest rate," he says.
Lenders, meanwhile, are looking for ways to grow. Wells Fargo saw double-digit gains in personal lending last year, says Mr. Denbo, who declined to provide specific figures.
Originations of personal loans fell sharply in 2008 and 2009, but have begun to edge up, increasing 4.5% in the first 11 months of 2011 compared with the same period a year earlier, according to the credit bureau Equifax.
Some banks are ramping up their marketing. U.S. consumers received 424.8 million offers in the mail for personal loans in 2011, up from 290.5 million in 2010, according to research firm Mintel Comperemedia.
TD Bank, a unit of Canada's Toronto-Dominion Bank, saw a 25% increase in applications for unsecured personal loans in November and December, says TD Bank Executive Vice President Michael Copley.
Renewed interest in personal loans comes as falling home values and tighter lending standards have made tapping home equity, once a common source of financing, less attractive and, in many cases, impossible.
Just 15% of homeowners who refinanced their mortgage in the fourth quarter increased their loan balance by at least 5%, the lowest level in 26 years, according to Freddie Mac. The number of new home-equity line of credit originations has fallen every year since 2006, according to Equifax.
Such loans aren't without risk, of course. The biggest: It can be tempting to pile on new charges after consolidating existing debt.
"If you're someone who relies on credit cards as a supplemental source of income, getting into a situation like this is always dangerous," says Abigail Ford, a manager at Consumer Credit Counseling Service of San Francisco.
Mark Cole, chief operating officer of CredAbility, an Atlanta-based credit counselor, advises borrowers to close existing lines of credit after taking out a personal loan. Otherwise, "all you are doing is really digging a deeper hole," he says.
A borrower with good credit can expect to pay 8.49% to 14.49% for a personal loan with a five-year term, according to loan tracker Informa Research. That compares well with rates as high as 24.9% on some credit cards, but can be higher than rates on mortgages and auto loans that are secured by collateral.
Some lenders offer even sweeter deals. American Eagle Federal Credit Union, based in East Hartford, Conn., this winter issued 12-month "Holiday Helper" loans with a 3.75% rate. This month, it will offer a debt-consolidation special with a rate as low as 6.5% for a loan with a 36-month term. Borrowers can cut their rate by an additional 0.25 percentage point if they arrange to have payments automatically deducted from their credit-union checking account.
Discover began offering unsecured personal loans about six years ago, but recently stepped up direct mail offers as part of its effort to diversify beyond credit cards. About two-thirds of borrowers also have a Discover credit card, but the company has started making more loans to new customers. It will lend up to $25,000. The loans are currently being offered by invitation only.
"Our ideal customer is someone who has a little bit of debt," says Discover Vice President Nick Brown. They are "actively trying to manage their finances and they are looking for a product that offers simplicity and financial benefits."
TD Bank offers loans from $5,000 to $50,000 for up to 60 months, with fixed rates of 6% to 10%. It targets borrowers with credit scores in the mid-700s, Mr. Copley says. Standards vary by lender, but borrowers with good credit generally have scores of 720 or higher.
Wells Fargo, meanwhile, will lend up to $100,000, but says $8,000 to $10,000 loans are most common. Rates range from 9% to 21%, depending on credit score, income, intended use of funds, relationship with the bank and total borrowings.
The bottom line, says Mike Sullivan, director of education for Take Charge America, a Phoenix-based credit-counseling agency: "If by consolidating debt you can pay it off faster or pay it off cheaply, thereby increasing your net worth over a five-year period, it's probably a good idea."
(Source: The Wall Street Journal, 02/13/12)
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