Banks Lose Personal Loan Battle: But Consumers Are the Real Victims


According to Experian, personal loans are the fastest growing debt category in the United States, with $300 billion in loans. That’s a double-digit increase year over year as Americans look to consolidate their debt and attend to near-term needs. Ironically, bank loans based on a home equity line of credit are on the decline despite having fewer 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 interest rate even higher. The net result is that struggling Americans incur even more debt as they try to get out. They often use this type of loan after they’ve already exhausted themselves with credit card loans with lower interest rates.

Why are personal loans so dangerous compared to what banks could offer? The monthly installments are not only high because of the interest, but because the term of the loan is shorter. The loan must also mobilize personal assets, making these loans tantamount to a legal loan shark.

Unfortunately, companies offering this type of loan do not yet have to undergo the same scrutiny as banks. While politicians rage about student loans, which are often offered at much lower interest rates than personal loans, they are missing out on the fastest-growing industry that exploits the middle class.

Banks can step in with credit counseling options or explore other potential means for their customers. In some cases, banks lose business from competitors who harm their customers. The industry needs innovations.

Banks should consider how they can offer longer-term personal loans at lower interest rates and target customers who would otherwise be attracted by these companies. In addition, banking advocacy groups like the American Bankers Association need to raise awareness of the danger some of these businesses pose to consumers.

For borrowers with good credit ratings, 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 modest income and some equity/savings to be sucked into payments that prevent them from saving or even holding on to what they already have.

This problem awaits a solution, and the community banks should be struggling with a healthy business answer.


About Author

Comments are closed.