High income and high credit scores don’t always go together, but when they do, it’s a powerful combination that banks love.
That’s according to a study by LendingTree which showed that people with prime credit take out bigger personal loans — because they can.
The online lender also found that there are significant differences in how borrowers with high credit scores and those with low credit scores use money from personal loans, according to data collected on closed loans. on its platform between April 2021 and March 2022.
Borrowers with higher credit scores — 720 or higher on a scale of 300 to 850 — were more likely to use personal loans to make home renovations that would increase the value of their residence or start a small business. On the other hand, low credit borrowers have often used personal loans to pay medical bills and meet other immediate needs.
“This report is as much about earnings as it is about credit scores,” said Matt Schulz, chief credit analyst at Charlotte, North Carolina-based LendingTree. “There’s a big difference between taking out a personal loan to invest in a home or business and using a loan to extend your monthly budget.”
A personal loan is a cash payment that can be used for just about anything. Some lenders ask borrowers what they intend to do with the money, but no one actually checks where the money is being spent. The bank only cares about being reimbursed on time.
High and low credit borrowers both take advantage of personal loans to consolidate consumer debt, but low-income and low-credit people more often use the borrowed money to cover the gap between their incomes. and their basic needs, according to local credit counselors.
“We’ve seen low-income clients use personal loans for things like college tuition and moving and relocation costs,” said Heather Murray, director of compliance and community relations at Advantage Credit Counseling, based in South Side.
Advisors at the nonprofit say Pittsburgh-area clients have taken out personal loans to pay for everything from their quarterly business taxes to divorce-related expenses.
“Now what we’re seeing is that customers with higher credit scores are using credit cards more because of the cost of day-to-day expenses,” Murray said. “Then they turn to personal loans to consolidate debt because they can’t stop using the cards. Once they get into that scenario, they start contacting us,” he said. she stated. “Usually when you’re in a place where you’re going into debt to pay off debt, it usually never works if you don’t change the behavior.”
When borrowers with high incomes and high credit scores come to take out personal loans, they tend to get big.
High-scoring borrowers have an average of $18,443 in personal loans, which is 122.2% more than the average amount of $8,301 taken out by consumers with scores below 720. High-scorers borrowing for improvements homeowners take out an average of $21,510 in personal loans.
However, the LendingTree study points out that the lower dollar amounts withdrawn by people who are in a lower income bracket are generally not by choice. In many cases, lenders will limit loan amounts for those with lower credit scores and then offer them extremely high interest rates.
Chris Chaney, vice president and financial adviser of Fort Pitt Capital Group at Green Tree, said wealthy people often prefer to borrow money for home improvements and cars if the loan allows them to keep their own money invested and to work for them.
“Our clients typically have lots of assets and lots of options,” Chaney said.
He said his clients – who typically have high net worth – always consult with him before taking on any debt, including personal loans, so he can consider all of their options and make a recommendation.
“I advise customers to use their cheapest money,” Chaney said. “So if you can borrow money at 1% or 2%, you don’t want to use the money you have which could make you more money over time. It’s expensive money .
“It may make more sense to use debt to buy a car and grow your money,” Chaney said.
Debt consolidation tops the list of personal loan uses for both higher and lower credit score borrowers.
“Personal loans are a great tool to help people not only save money, but also streamline their finances,” Shulz said. “Processing just one debt payment each month rather than four or five separate payments is a big deal, which is why people of all kinds use them that way.”
Low-scoring borrowers were more likely to use personal loan proceeds for experiences such as vacations and weddings that are meaningful to individuals but unlikely to generate more future income for the family.
But it might be acceptable in certain situations when it comes to some financial advisors.
“If an unsecured personal loan is your only option, I guess you have to do what you have to do,” said J. Victor Conrad, owner of Pinnacle Financial Strategies in Pine Township.
He said he doesn’t like personal loans because they tend to come with higher interest rates than home equity lines of credit. Her professional experience has been more related to working with clients who use their home equity for loans and obtaining better rates.
“My observation from 40,000 feet is that those with lower credit scores tend to have less secure finances,” Conrad said.
“Using more expensive personal loans for things like these purchases is probably only making their overall financial situation a bit worse – certainly not better and probably not even on the spot.”