Millennials turn to personal loans; the pros and cons

Increasingly, millennials appear to be turning to personal loans when they have financial gaps.

According to LendingPoint, a Kennesaw, Georgia provider of personal loans, since issuing its first loan in 2015, the proportion of its borrowers age 18-35 has doubled, from about 12% in 2015 to 24% in 2018. Customers 30 and under have almost quadrupled, from less than 3.5% in 2015 to nearly 13% in 2018. 

Why are millennials borrowing money? For weddings, moving expenses, major purchases like a refrigerator, upgraded computer equipment, and other big-ticket items, according to LendingPoint’s research.

While personal loans are filling a void for millennials, they have benefits as well as liabilities.

The pros

Personal loans can be a good solution for consolidating high-interest debt like credit cards. Having just one loan helps lower your credit utilization ratio, thus helping your credit score.

Interest rates on personal loans are also often fixed, while most credit cards have variable rates. Typically, interest rates on personal loans are lower than credit cards as well. 

The cons

Personal loans can have origination fees of 1-5% of the loan amount, says Joe Toms, president of FreedomPlus, a provider of personal loans based in San Mateo, California.

Terms are also typically short, between 3-5 years. Says Chad Risxe, co-founder of Millennial Wealth in Seattle, “This means potentially high monthly payments and a negative impact on cash flow, making saving and working towards your other financial goals more difficult.”

You might be better off going to the bank of Mom and Dad.