Some consumers to dispose of plastic and instead turn to personal loans and credit lines to get more control over their financial lives – perhaps use them to repay credit card debt, pay taxes or to fund a trip down the aisle.
At the beginning of each year, “we see increased demand” for products, said Todd Denbo, a vice president in Wells Fargo’s management group of credit. “Consumers are starting the new year with their personal finances in mind.”
Debt of Wells Fargo Pay Down Solution is particularly popular with consumers who want to consolidate their credit card debts into a fixed rate loan, that works for a fixed amount of time at a fixed interest rate, Denbo said.
How the work of personal loans
Personal loans and lines of credit are unsecured, so there is no guarantee as a house or car required for approval, and in most cases they can be used for the desires borrowers.
With a personal loan, a consumer borrows a fixed amount of money for a certain period at a fixed interest rate and pays a fixed monthly payment.
A personal line of credit is similar to an equity line of credit, and borrowers can tap into it, if necessary. The payment varies with the amount due, the annual rate may also vary with the creditworthiness of the borrower.
The rate of a consumer pays varies depending on credit history and credit score, and may also be influenced by the relationship of the borrower with a financial institution or purpose of the use of money. Your income and assets can also be watched.
The total value of the unknown market
The total value of personal loans and lines of credit is difficult to find. Personal loans are taken by many institutions, large and small, flat and Federal Reserve statistics them in other types of loans, making it difficult to isolate. With banks and credit unions, social lending is gaining ground. With social lending or peer-to-peer, there is no traditional financial institution involved. Instead, individual borrowers are connected to individual investors through sites such as Lending Club and Prosper.com.
At credit unions, unsecured loans are broken down into credit cards and “total unsecured loans”, with personal loans accounting for the vast majority of them. In National Credit Union Association data, the total value of “all unsecured loans” was 25.58 billion dollars in December 2011. This is a slight increase of 25.47 billion in December 2010.
Ben Rogers, director of research at the Filene Research Institute, a think tank supported by the sector of credit unions, credit unions, said to face intense competition from banks for mortgages and auto loans, which are both secure.
In contrast, credit unions are “generally more willing to write loans,” said Rogers.
The demand comes not just consumers who want to pay the credit card debt. While the economic downturn took hold, companies cut credit card spending limits many consumers or canceled cards. And home equity loans and credit lines are out of reach for many consumers whose homes are now underwater.
Below average in April credit cards
The lower interest rate on personal loans from a credit card can also be a draw. The Federal Reserve, the average rate on a personal loan of 24 months with a bank in November 2011 was 10.52 percent, compared to 12.36 percent for a credit card.
It’s a bigger gap than in 2007, when the average rate on personal loans was 12.38 percent, whereas it was 13.30 percent on a credit card.
At Wells Fargo, the demand for personal loans reflects “consumers have an incentive to clean up their balance sheets,” Denbo said.
JJ Montanaro, a certified financial planner with USAA, said the bank has not seen an increase in demand for personal loans, but the products can be attractive because unlike credit cards, they have “a real beginning and end true. “With fixed payments, it is easier to budget each month.
Since most interest rates have declined overall, USAA has lowered its best annual percentage rate (APR) of 12 percent to 10.99 percent for a 12 – to 48-month personal loan .