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Credit cards aren’t the only option when it comes to financing purchases or consolidating debt. Personal loans are a popular choice thanks to digital offerings that make it easy to apply and get approved.
But before you sign on the dotted line, you have to make sure a personal loan is right for you. To do that, you have to understand the inner workings of this borrowing tool. You don’t want to end up with an expensive loan you didn’t understand or one you’re ill-equipped to pay back.
Rewind ten years when consumers had fewer options when it came to borrowing money. They could use a credit card, which usually meant paying high interest rates, or apply for a bank loan, which was hard to get without top-notch credit. The 2008 recession changed that.
With little in the way of consumer lending being done by the banks, a crop of financial technology startups (or FinTechs) emerged to offer consumers personal loans. Using different underwriting data and algorithms to predict risk, they created a market that’s now booming.
According to TransUnion, the credit scoring company, unsecured personal loans reached $138 billion in 2018, an all-time high, with much of the growth coming from loans originated by FinTech companies. The average loan size in the fourth quarter of 2018: $8,402. Fintech loans account for 38% of the overall activity in 2018; five years ago, it was just 5%.