Personal loan use grows as consumers tackle high-rate credit card debt
A growing number of Americans are turning to balancing transfers and personal loans to consolidate and manage their debt. Experts say this may save money in the short term, but without a change in spending habits, this strategy will likely fail.
“If they haven’t fixed the issues that caused them to overspend and charge their credit cards in the first place, then they’re going to start charging them again,” said Jim Triggs, CEO of Money Management International, a nonprofit credit counseling firm. “You can never borrow to get out of debt. You’re going to have to pay it back eventually.”
Credit card balances hit a record $1.28 trillion by the end of 2025, according to the New York Fed. And many consumers are struggling with higher daily expenses.
Personal loans, which provide a lump sum of money and are typically repaid within two to five years, can be a smart way to consolidate high-interest debt. Rates depend on the borrower’s creditworthiness; average 12.26%opposite 19.58% For credit cards, according to Bankrate.
Last year, 40% of new credit counseling clients at Money Management International had an existing personal loan on their credit report; this rate was 27% in 2020.
“We think most of the consumers we see are middle class. They have jobs, they have debt, they have homes, and they’re struggling with their debt.” said Triggs.
one february to guess TransUnion, one of the three major credit reporting agencies, predicts that unsecured personal loans will be the main driver of new borrowing this year.
‘It’s a never-ending cycle’
But as Triggs says, consolidating debt is not a panacea.
2023 TransUnion The research found that people who consolidated debt reduced their credit card balances by an average of 57%, but after 18 months many borrowers were back to their previous debt levels.
Historically, 14% to 17% of new personal loans were used to refinance previous personal loans, according to TransUnion data provided to CNBC.
It was the same for Demetrius Thrasher, 38, a Navy veteran. He said that he first took out a personal loan in 2022 to make ends meet and consolidate his car loan and credit card debt. He has refinanced multiple times, most recently in January after a car accident upended his plans to pay off his debt. His most recent personal loan has a 19% interest rate.
“I’ve gotten to the point where I’m getting too carried away,” said Thrasher, a restaurant worker who recently returned to college in Atlanta in hopes of finding a better job. “It’s a never-ending cycle and I’m ready for it to end.”
Eliminate debt shame
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Financial therapy can help some debtors fix underlying problems that are contributing to the debt. “Debt cancellation isn’t just about math,” he said Rahkim Sabree is an accredited financial advisor.
How people respond to stress can help them break the cycle of debt, he said, and thus help them understand marketing and advertising systems designed to encourage spending. Once people understand the emotions surrounding their spending, they can set realistic expectations for paying off their debt.
“This helps people eliminate shame and guilt from their situation, so they can now see the debt they carry through a clearer lens,” Sabree said.
The key to paying off debt is for the debtor to choose a strategy they can stick to and then continue to reduce slowly. “This change in behavior is not something that will happen overnight,” Sabree said.
Nonprofit debt counselors can help negotiate a debt management plan with creditors that can lower interest rates and extend repayment terms. A personal loan, balance transfer, or other vehicles may or may not be the right options as part of this grand plan.
“Consumers should take some time to look at the whole picture and choose a solution that provides long-term stability, not just short-term relief,” Triggs said.
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