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Banks are Losing the Battle for Personal Loans: But Consumers are the Real Victims

These loans are equivalent to legal loan sharking

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  • Written by  Banking Exchange staff
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Banks are Losing the Battle for Personal Loans: But Consumers are the Real Victims

According to Experian, the fastest growing debt category in the United States is personal loan balances with $300 billion in loans. Year over year, that is a double digit increase as Americans look to consolidate debt and take care of short-term needs. Ironically bank loans based on a home equity line of credit are in decline despite having less dangerous pitfalls for the consumer.

Personal loans tend to have higher interest rates especially for those with questionable credit ratings. Personal loans for consumers with low credit ratings can be as high as 35% with upfront fees that can make the actual rate even higher. The net result makes Americans that struggle go into even further debt while trying to climb out. They often use these types of loans after they are already maxed out on credit card loans with lower interest rates.

Why are personal loans so dangerous compared to what banks might be able to offer? The monthly payments are not only high because of interest rates, but because the length of the loan is shorter. The loan also must leverage personal assets, making these loans equivalent to legal loan sharking.

Unfortunately, companies that offer these types of loans have yet to fall into the same scrutiny as banks. As politicians rage over student loans, which are often at much lower interest rates than personal loans, they are missing the fastest growing industry that exploits the middle class.

Banks can step in with credit counseling options, or to assess other potential means for their customer. In some cases, banks are losing business from competitors that hurt their customers. The industry is in need for innovation.

Banks should consider how to offer personal loans at longer time periods with lower interest rates, and target customers that would otherwise be subject to solicitations from these companies. Additionally, advocacy groups for banks such as the American Bankers Association need to raise awareness on the danger that some of these companies cause consumers.

For borrowers with good credit, personal loans do what a home equity line of credit does and can help fund short term projects at reasonable interest rates. But the danger of personal loans is for the family with a moderate income and some equity/savings that are being sucked into payments that will prevent them from saving or even holding on to what they already have.

This problem is waiting for a solution, and community banks should fight for the business with a healthy answer.

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