Sometimes the solution to getting back on track when you’re struggling with debt payments is another loan, according to a new TransUnion study.
That might not seem logical — but researchers at the credit reporting agency found that, in some cases, taking on a personal loan can help both the borrower and the lender.
Read on for more about the study and for other tips that can help with getting debt under control.
- What did the TransUnion study find?
- Why are you hearing so much about personal loans lately?
- What can you do to manage debt?
In its study, TransUnion looked at 30,000 people who took out unsecured personal loans in 2017 — half of the borrowers were not delinquent on their debt one month prior to getting the new loan and the other half were. The credit reporting agency then reviewed what happened with those borrowers over the next 12 months.
Although many of the delinquent borrowers continued to struggle after receiving a new personal loan, almost a third (31%) improved on one or more of their past due debts after getting a personal loan. And 24% of borrowers succeeded in keeping up with payments on the new personal loan.
The study found that delinquent borrowers who succeeded in turning their situations around had certain things in common.
- They were experienced with credit (having at least one credit account that’s 10 years or older)
- They had a substantial amount of existing credit (an average of eight open trade lines)
- They had a greater proportion of revolving credit (credit card) accounts versus installment accounts (mortgages, auto loans, etc.)
TransUnion says this highlighted that some borrowers don’t have chronic debt problems, but instead may be dealing with something unexpected — like a car bill or medical expense — and just need a boost to get their finances back under control.
Recent data from the Federal Reserve Bank of New York shows that in the first few months of 2019, total debt was over $13 trillion, up from the same period last year.
The Fed data shows that credit card debt makes up a significant portion of that total debt, having climbed from $815 billion in the first quarter of 2018 to $848 billion in the first quarter of this year. And there’s some indication that personal loans have been rising in popularity as people may be using them in many cases to help pay off credit card debt.
If you’re having a hard time getting on top of your debt, consider these strategies.
- Create a budget (and stick to it). Knowing how much money is coming in and going out each month is the first step to understanding how much you can put toward paying off debt. You could try the 50/30/20 method, which calls for spending 50% of your income each month on necessities like rent, routine bills and paying off debts, 30% on things you’d like to buy or do, like a summer vacation — and 20% for savings.
- Find the right method for paying down your debt. Two commonly known methods you can use to pay off debt are the snowball method and the avalanche method. Think about each approach and consider which might work best with your budget and be easier to stick with.
- Use a lower-interest personal loan to consolidate debt. If your budget doesn’t give you enough room to pay down debt, think about taking out a short-term personal loan to help you pay off what you owe. A personal loan can be especially helpful when it comes to paying off high-interest debt like credit cards. Because personal loans often have lower interest rates than credit cards, you can use one to consolidate your credit card debt and pay less interest in the long run.