Unsecured Loans and Credit Card Spending Are on the Rise – What are the Risks?

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After a slowdown in credit card spending and unsecured personal loans during the COVID-19 pandemic, both are up sharply again. Bank card balances in the United States hit an all-time high during the third quarter of 2022, according to a new report from TransUnion. Meanwhile, unsecured personal loans have seen record growth in both originations and balances.

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TransUnion’s Quarterly Third Quarter 2022 Credit Industry Outlook Report, released Nov. 8, found credit card balances reached $866 billion in the third quarter, up 19% compared to the previous year. The gain was strongly driven by the growth of Gen Z and Millennial borrowers, whose balances grew 72% and 32%, respectively.

The record growth in unsecured personal loans — those not backed by collateral — was partly due to significant increases in lending at below-risk levels, TransUnion said in a news release. This increase, combined with a general deterioration in the financial health of subprime consumers due to soaring inflation, has led to a similar increase in delinquencies, which have now exceeded pre-pandemic levels.

“Inflation is a factor in that it probably played a role in increasing the demand for personal loans in the first half of the year,” said Salman Chand, vice president of loans at the consumption at TransUnion, told GOBankingRates in an email. But we also saw a very strong willingness/ability on the part of lenders to make more loans in the first half of the year. This is likely due to the increased availability of capital that lenders wanted or needed to deploy during this time.

TransUnion found that consumers with access to personal loans grew to 22 million during the third quarter of 2022, from 19.2 million the previous year. The average personal debt per borrower rose from $9,387 to $10,749. Average credit card debt per borrower also increased from $4,857 in Q3 2021 to $5,474 in Q3 2022.

Although unsecured personal loans allow people to pay their expenses when they are short on cash, they also come with risks. Interest rates are generally higher for unsecured loans than for secured loans. In some cases, the interest rate is considerably higher, making them more difficult to repay.

You don’t have to worry about losing your collateral with an unsecured loan. But as Experian noted on its website, the cascading effects of being late on your payments can cause significant damage to your credit and finances.

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If an unsecured loan goes into default, your credit score will take a big hit and the default could stay on your credit report for up to seven years, according to LendingTree. This can make it difficult to qualify for future loans. You could also face wage garnishments, lawsuits and liens against your property from your lender.

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This article originally appeared on GOBankingRates.com: Impact of Inflation: Unsecured Loans and Credit Card Spending Are on the Rise – What are the Risks?

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