For the study, Bankrate examined responses from more than 160,000 Americans seeking prequalification on a personal loan in the first quarter of 2020.
As COVID-19 launches a wave of economic uncertainty, leaving more than 22 million people newly out of work, many banks are adjusting their personal loan options to help people stay afloat.
But it’s the best of times and the worst of times to apply for a personal loan. While banks like U.S. Bank and Five Star Bank have announced new loan offerings with lower interest rates, many lenders are also enforcing stricter qualification requirements.
“Benchmark interest rates have fallen dramatically with the Fed cutting rates aggressively in the month of March, but just because rates are lower doesn’t mean everyone can get those rates,” says Greg McBride, CFA, Bankrate chief financial analyst.
Key findings
- Debt consolidation and emergency expenses are the most common loan uses.
- Most consumers are looking for loans of $2,000 to $25,000.
- Emergency expenses require the smallest loans, while debt consolidation requires the largest.
Consolidating debt is a priority
The major reasons consumers sought personal loans from January to March include debt consolidation (38 percent) and paying emergency expenses (23 percent).
As economic uncertainty grew throughout the first quarter of 2020 and many people lost work, it’s likely that many borrowers sought to simplify their financial picture while taking advantage of falling interest rates.
In fact, The Federal Reserve and four other agencies in mid-March made a joint statement encouraging financial institutions to “offer responsible small-dollar loans to consumers and small businesses in response to COVID-19.”
Many community banks answered the call by lowering APRs on personal loans. U.S. Bank, for instance, recently cut its APRs to 2.99 percent for loans between $1,000 and $5,000. Five Star Bank also announced that it will offer personal loans of up to $5,000 at a 2.95 percent interest rate.
Even as home renovation season nears, just under 5 percent of people applying for prequalification wanted a loan for home improvements. This low percentage might reflect the fact that homeowners are more likely to opt for a lower-rate secured loan such as a home equity line of credit for renovations rather than a personal loan. This lending could also become harder to get in the coming months as lenders pull back on HELOC loans.
Midsize loans are popular among borrowers
Bankrate’s study shows that about two-thirds of borrowers applying for prequalification through Bankrate in the first quarter sought loans between $2,000 and $24,999.
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