Americans are hungry for personal loans that they can use as quick cash to pay for anything from vacations to credit card debt, a potential red flag for the economy.
Personal loans are up more than 10% from a year ago, according to data from Equifax, a rapid pace of growth that has not been seen on a sustained basis since shortly before the Great Recession. All three of the major consumer credit agencies -- Equifax, Experian and TransUnion -- report double-digit growth in this market in recent months.
Experts are surprised to see millions of Americans taking on so much personal loan debt at a time when the economy looks healthy and paychecks are growing for many workers, raising questions about why so many people are seeking an extra infusion of cash.
"Definitely yellow flares should be starting to go off," said Mark Zandi, chief economist at Moody's Analytics, which monitors consumer credit. "There's an old adage in banking: if it's growing like a weed, it probably is a weed."
Personal loans are unsecured debt, meaning there is no underlying asset like a home or car that backs the loan if someone cannot repay. The average personal loan balance is now $16,259, according to Experian, a level that is similar to credit card debt.
Personal loan balances over $30,000 have jumped 15% in the past five years, Experian found. The trend comes as U.S. consumer debt has reached record levels, according to the Federal Reserve Bank of New York.
The rapid growth in personal loans in recent years has coincided with a FinTech explosion of apps and websites that have made obtaining these loans an easy process that can be done from the comfort of the living room couch. FinTech companies now account for nearly 40% of personal loan balances, up from just 5% in 2013, according to TransUnion.
Over 20 million Americans now have these unsecured loans, TransUnion found, double the number of people that had this type of debt in 2012.
"You can get these loans very quickly and with a very smooth, sleek experience online," said Liz Pagel, senior vice president of consumer lending at TransUnion. "We haven't seen major changes like this in the financial services landscape very often."
Total outstanding personal loan debt stood at $115 billion in October, according to Equifax, far smaller than the auto loan market ($1.3 trillion) or credit cards ($880 billion). Economists who watch this debt closely say personal loans are still too small to rock the entire financial system in the way that $10 trillion worth of home loans did during the 2008-09 financial crisis.
But personal loan debt is now back at levels not far from the January 2008 peak, and most of the FinTech companies issuing this debt were not around during the last crisis, meaning they have not been tested in a downturn.
"The finance industry is always trying to convince us that there are few risks to borrowing and overleveraging is not a problem," said Christopher Peterson, a University of Utah law professor and former special adviser to the Consumer Financial Protection Bureau. "Overleveraging yourself is risky for individuals and for our country."
The U.S. economy is powered by consumer spending, and debt helps to fuel some of the purchases. Economists are watching closely for signs that Americans are struggling to pay their bills, and personal loans could be one of them.
The most common recipient of a personal loan is someone with a "near prime" credit score of 620 to 699, a level that indicates they have had some difficulty making payments in the past.
"The bulk of the industry is really in your mid-600s to high 600s. That's kind of a sweet spot for FinTech lenders," said Michael Funderburk, general manager of personal loans at LendingTree. "We see a lot of consumers that have been doing perfectly fine in their financial life. They are gainfully employed. They have a family. They have a mortgage, but something happened. They lost a job. Or a medical emergency ... the net result of that is they missed a bill or ended up with a little bit more credit card debt than they wanted."
The vast majority of customers go to FinTech providers like SoFi, Lending True, Lending Club and Marcus by Goldman Sachs for debt consolidation, the lenders say. People run up debt on multiple credit cards or have a medical bill and credit card debt and they are trying to make the payments more manageable. Some seek a lower monthly payment, similar to refinancing a mortgage. Others want to pay off the debt in three years to clean up their credit score.
FinTechs say they are helping people make smarter financial choices. While a credit card allows people to keep borrowing as long as they are under the credit limit, a personal loan is for a fix amount and must be paid off over a fixed amount of time, generally three or five years. Some online lenders allow people to shop around for the best rate, and most of the main players cap the interest rate at 36% to ensure they are not offering any payday loan products.
But there is concern that some Americans get personal loans to tide them over and then continue to take on more credit card or other debt.
Credit card debt has continued to rise alongside personal loans, according to the latest data from the Federal Reserve Bank of New York. TransUnion has recently noticed an uptick in retailers offering personal loans when someone comes to the cashier to buy furniture or holiday toys.
"I have fixed feelings about personal loans. They are superior to credit cards because the payments are fixed," said Lauren Saunders, associate director of the National Consumer Law Center. "The problem is many people still have their credit card and end up running up their credit card again, so they end up in a worse situation with credit card debt and installment loans on top of it."
Saunders also notes that these loans are mainly regulated by state law, and the rules and watchdog capabilities vary widely by state.
FinTechs say they are trying to help people make better choices. One of their big innovations is giving people who take out personal loans a discount if they transfer the cash they get from the loan directly to pay off their bills instead of sending it to their bank account first.
"This has been one of the most successful products we have ever launched. People are trying to do the right thing and they're getting offered a lower rate if they do balance transfer and direct deposit," said Anuj Nayar, financial health officer at LendingClub, a peer-to-peer lender that offers personal loans up to $40,000.
Despite the rapid growth in personal loans lately, borrowers appear to be able to pay back the debt. The delinquency rate for personal loans is 4.5%, according to Equifax, a low level by historical standards and well below the 8.4% delinquency rate in January 2008.
But as the number of Americans with one of these loans grows, so does the potential for pain if the unemployment rate ticks up and more people find themselves strapped for short-term cash.