We all know that American debt levels continue to hit tragic levels year after year. According to a recent study from The Balance, average credit card debt for U.S. households worked out to $8,398 per household in June of 2019. Student loan debt levels have become a $1.5 trillion dollar crisis, and we borrow way too much to finance new cars that depreciate at a rapid pace. In fact, the average new auto loan worked out to a shocking $32,187 during the first quarter of 2019, and nobody seems to care.

Not surprisingly, the usage of personal loans is also on the rise, as evidenced by a 2019 survey from credit reporting agency Experian. Personal loans are currently the fastest growing type of consumer debt, they note, showing an 11.9% increase from the fourth quarter of 2017 to the fourth quarter of 2018. The average personal loan balance is shockingly high too — currently $15,143 with an average monthly payment of $353. The average APR on these loans is at around 9.37% according to Experian data, which isn’t the worst rate you can get but not that great either. In the final quarter of 2018, 6.1 million personal loans were originated, and 34.3 million consumers had a personal loan. In total, these consumers owe approximately $291 billion dollars.

The Rise Of Personal Loans Considering personal loans were once a more obscure borrowing option, this all seems somewhat strange. Why are so many consumers taking out personal loans these days? And perhaps more importantly, what are they doing with all the money? Experian has a few insights into why personal loans are on the rise, and their suggestions make sense. For one, Americans “are feeling confident about a steady economy amid historically low unemployment rates,” they note. Also, personal loans have gone mainstream thanks to a surge in online lenders who have been heavily marketing their products as a lower cost alternative to credit cards. “Several startups have contributed to the growth and now account for more than 40% of all new personal loan originations, according to Experian data,” they note. The rise of personal loans may also be attributed to the fact that many online lenders have been smartly marketing them as tools to escape the high interest rates credit cards charge. After all, the average credit card interest rate is currently over 17%, which is a little less than half of the average APR for personal loans. Personal loans also come with fixed interest rates and a fixed monthly payment that will never change, which makes them a much more constant, predictable option for consumers who want to create a foolproof plan to pay off debt over time. Of course, debt consolidation isn’t the only way consumers are using personal loans to their advantage. People also use fixed-rate personal loans to pay for large home remodeling projects, finance a large purchase like furniture or new carpet, or even pay for college tuition. Since personal loans are unsecured, you can use the funds however you want — and that’s exactly what people do. The Problem With Personal Loans And herein lies one of the core issues with personal loans — they’re unsecured. Where an auto loan is secured by a car that has some value and your home mortgage is secured by property you own, personal loans aren’t secured by collateral. This means that consumers tempted by low rates and monthly payments may wind up spending their loan funds on a vacation to the Bahamas or a luxury shopping spree. And, even if you aim to use a personal loan to consolidate and pay off debt, the loan itself may create more problems than it solves. Transferring high-interest credit card debt to a personal loan won’t prevent you from racking up new balances on your credit cards — only you can do that. The reality is that, just like 0% balance transfer credit cards that let consumers consolidate debts without interest for a limited time, personal loans often encourage more spending because they free up credit lines that can be hard to ignore if you have a spending problem anyway. Another problem with personal loans is both an advantage and a disadvantage. Thanks to modern technology offered by lenders and platforms like Marcus by Goldman Sachs, LendingTree, and LightStream, applying for a personal loan is a piece of cake. You can fill out an entire loan application online and from the comfort of your own home, have your loan approved in minutes, and see your funds transferred to your bank account in just a few business days (and sometimes sooner). Considering most personal lenders let you borrow up to $35,000 and some offer loan amounts as high as $100,00, it’s not difficult to see how this much convenience can be downright dangerous. Before You Take Out A Personal Loan, Read This With the holidays looming closer every day, online lenders are already trying to lure unsuspecting borrowers into taking out a personal loan to cover holiday gifts, end-of-year travel, and more. LendingTree has a whole page on their website dedicated to “holiday loans,” for heaven’s sake. “Need extra cash for the holidays?” they ask, noting that “a holiday loan can help bridge the gap between your gift list and your bank balance.” First Financial Credit Union advises that you “enjoy the season more when you reduce the stress” on their holiday loan page, only to suggest that you take out a personal loan with an APR of 9.990%. I’m not picking on these companies specifically, and there are plenty more who are already spending advertising dollars for the holidays. But I am saying that you should think long and hard about borrowing for the holidays or any other reason. Regardless of why you want to take out a personal loan, it’s crucial to remember you’re still borrowing money. The monthly payment and APR may be affordable, but you’re still agreeing to make monthly payments for years. Is an updated bathroom, a Caribbean cruise, or a new flat-screen television for your bedroom worth that kind of commitment? Only you can decide, but I’m guessing probably not. Can personal loans really help you get out of debt? At the end of the day, their utility depends solely on how much self-discipline you have. It can make sense to take out a personal loan to consolidate debt at a lower interest rate, but only if you are going to stop using credit cards. If you plan to keep using credit and will probably max out your balances again, a personal loan could easily leave you with more debt in the end — and worse off than when you started. The bottom line: Banks and online lenders are after your hard-earned dollars once again, but personal loans aren’t always the helpful tools they’re made out to be. Before you fall for the hype, make sure you’re borrowing for the right reasons.