Rose 2020 Emergency & Relocation Personal Loans | Smart Change: Personal Finances
Some consumers’ financial priorities – including reasons why they borrowed money – changed last year during the economic downturn caused by the COVID-19 pandemic.
According to anonymized NerdWallet membership data, the most popular and least popular reasons for taking out a personal loan stayed roughly the same, but borrowing for emergency costs and moving increased, while the percentage of borrowers who said they wanted a debt consolidation loan decreased.
Uncertainty about the economy has slowed demand for all types of credit, says Rich Tambor, chief risk officer at lender OneMain Financial.
“Especially in the second quarter when people were looking into the abyss and no one knew what was happening, people just got conservative,” he says.
You can use a personal loan for almost anything. If you qualify to view potential loan offers, a lender will ask for information about you, such as: NerdWallet also collects this information to pre-qualify you with multiple lenders at the same time.
So these reasons changed from 2019 to 2020, according to NerdWallet members who have pre-qualified for a personal loan and received a loan offer.
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Emergency loans are ticking up
According to NerdWallet’s prequalification data, borrowing for emergency expenses increased the most from 2019 to 2020. While around 6% of pre-qualified members stated in 2019 that they wanted to take out loans for an emergency, almost 11% stated this reason in 2020.
Consumers who did not have an emergency fund at the time of the pandemic were vulnerable, says Brian Walsh, senior manager of financial planning at online lender SoFi. They did what they had to do to weather a financial hardship – be it with a personal loan, credit card, home equity, or retirement plan.
“It was just, ‘How can we limit the damage from a long-term financial perspective if we’re trying to make ends meet?'” He says.
Emergency loans are an option when you need cash quickly, but there may be cheaper alternatives to consider during a crisis.
For example, a friend or family member could loan you the money without interest. You can also consider a second job to bring in extra cash or get support from local nonprofits that can help meet essential living expenses.
More moving loans
Of those borrowers who pre-qualified in 2019, only around 2.5% chose relocation as the reason for their loan. That number has increased by about a whole percentage point in 2020.
That’s not a huge percentage, but it’s a notable change for a year as many Americans started working from home full-time. By autumn, some companies had relaxed their in-office mandates in favor of flexible working hours or full-time remote employees.
Much like taking out emergency loans, personal loans are not always the best choice for financing a move. But if you need to take out a loan to pay for the move, where do you get the money from may not be the right first question, says Walsh.
“If you don’t have the money to move, is it necessary to move, or can you postpone it for six months, a year, or two years to save that money?” He says.
Less debt consolidation and refinancing
Debt consolidation is consistently one of the most common reasons people take out personal loans, and it stayed that way in 2020. These loans group together multiple unsecured debts like credit card debt and other high interest rate loans and leave a single month of payment for the new loan.
Debt Consolidation Loans are popular because they can have lower annual percentages than credit cards. Often times, a personal loan is the best way to consolidate debt when you can get a lower interest rate than you are currently paying.
But the percentage of people who said they prequalified themselves for a personal loan to consolidate debt or refinance credit cards fell in 2020. This, along with vacation, was one of the only reasons NerdWallet members voted less often.
At the start of the pandemic, many lenders slowed lending and tightened their lending standards. At the same time, borrowers tightened their budgets.
In the past year, consumers have become âremarkably financially responsibleâ in the face of economic uncertainty, says Tambor.
“People are paying off credit cards, they are paying off debts, so you just see a little less debt consolidation,” he says.
Although debt consolidation borrowing has decreased over the past year, it was still the most popular reason NerdWallet members cited during pre-qualification. More than half (55%) said they wanted to consolidate their debt. Another 7% said they wanted to refinance their credit card with a personal loan.
House renovations remained consistent
Approximately 7% of prequalified NerdWallet users chose home renovation as the reason for borrowing in 2020, which is in line with the previous year.
Despite the persistence, many consumers saw the pandemic-triggered stay-at-home orders as an opportunity to tackle projects they either didn’t have time to do or hadn’t thought of before, Walsh says.
“For some people, it was just the fact that this was most of the time they’d ever spent at home,” he says. “Other people just had more time to leave the house because they weren’t that busy, so it gave them the opportunity to do (renovations) what they intended.”
Homeowners often pay for home improvement projects with cash. When you don’t have the cash to cover a project, personal loans are one of the few financing options available.
Often times, these loans can be funded in less than a week and typically repay in around two to 12 years, which makes them a great choice if you are starting the renovation – and want to pay back the loan quickly.
Other reasons for a personal loan
Vacation, business expenses, and âmiscellaneousâ are also options consumers can choose when they qualify for a personal loan with NerdWallet. About 14% chose âOtherâ in 2020, up from 10% in 2019. Vacation was less than 1% of the reasons NerdWallet members pre-qualified, and those looking to cover business expenses did about 2% % the end.
Tips for Obtaining a Personal Loan During a Recession
Tambor says that when it comes to borrowing, knowing your current budget and how a personal loan will change is important.
Here are some more tips on how to get unsecured credit in a changing economy.
The reason matters. Sure, you can get a personal loan for most expenses, but some lenders offer different annual percentages for different loan purposes. For example, online lender LightStream lists a lower APR on home improvement projects than on medical expenses. Others will consider the reason you state in your application when determining your tariff.
Maintain your credit rating. Your creditworthiness is an important, if not the only, factor in determining whether you will qualify for a personal loan and the interest rate you will receive. The best interest rates go to borrowers with good creditworthiness and long histories of on-time payments for things like credit cards and auto loans.
Keep your debt down. Lenders want to be sure that you can make your payments on time each month and still have money to spare. If you have a high debt to income ratio, you may want to pay off some of that other debt before filing an application.
Prepare your documents. Of course, lenders have looked carefully at what you report as your income and the documentation you provide to support it. A steady income, reflected on W-2s and payrolls, will go a long way on a loan application, even as the economy improves and lenders relax their standards.
Compare options and offers. Pre-qualification you can see the rate and amount you can get on a personal loan and then compare it to other offers and financing options such as credit cards. Since there is no hard credit pull, NerdWallet allows you to pre-qualify with multiple lenders at the same time without compromising your creditworthiness.
Analysis methodology available in original article, published by NerdWallet.