Survey: Here’s What Americans Used Personal Loans For During The Pandemic
The pandemic has many people on the hunt for additional cash flow, and a new survey finds that Americans turned to personal loans for numerous reasons—from fixing their car to paying medical bills.
A March survey conducted by Ipsos for Forbes Advisor asked Americans whether or not they took out a personal loan during the pandemic (from the beginning of 2020 to present) and, if so, how they used the funds. It shows that 25% of respondents who said they took out personal loans used the funds for home improvement projects, which was the most common purpose.
Learn more about personal loans:
- Personal Loan Debt Statistics During The Pandemic
- Home Improvement Loans: Everything You Need To Know
- 6 Ways To Keep Your Covid-19 Home Renovation Project On Solid Footing
- Renovating Your Home? These 4 Things Are In Short Supply—And Could Cost You Time, Money
- Best Home Improvement Loan Lenders 2021
- What Is Debt Consolidation & How Does It Work?
- Best Personal Loans For Debt Consolidation 2021
The survey also found that people who have children in the house were far more likely to say they used a personal loan for home improvement than those who are living without children. This may reflect the increased interest in home remodeling projects during the pandemic.
Meanwhile, part-time workers were more likely to take out a loan to cover medical bills, auto repairs, financing a vehicle, moving expenses or education expenses than full-time workers or those not employed or retired.
5 Most Common Personal Loan Uses During the Pandemic
Just 24% of Americans took out a personal loan during the pandemic, but the reasons why they applied may show how personal loan use shifted during Covid-19.
About a quarter of all respondents who took out a personal loan said they used the funds for home improvements, the highest response in our survey. The other most common uses include medical bills (21%), debt consolidation, (20%), financing a vehicle (20%) and auto repairs (20%).
It’s clear these are the five primary reasons why people took out a pandemic personal loan. However, because the majority of respondents said they didn’t take out a personal loan during the last year, there is no statistical significance, for example, between the percentage of people who took out a loan to make home improvements and those who took out a loan for debt consolidation.
1. Home Improvement
The home improvement industry saw a surge of activity throughout the pandemic. Research shows that 70% of Americans tackled home improvement projects during the pandemic. What’s more, according to a Consumer Specialists survey, Americans were taking on home improvement projects because they simply had more time and were spending it at home.
People can also use home equity loans and HELOCs to help finance these projects, but you must be a homeowner who has equity in their home—the home’s current market value minus the mortgage balance. For that reason, they are not as widely available as personal loans.
2. Medical Bills
The last thing you want is the cost of health care to stand in the way of the medical attention you need. Just about half (49%) of U.S. adults say they don’t seek medical care because they’re worried about an unexpected bill, and 44% say they wouldn’t have the money to afford a $1,000 unexpected medical bill, according to a survey by The Harris Poll on behalf of the American Heart Association.
While Americans may not have the funds on hand to afford some medical bills, they can rely on two methods to help them: financing and negotiating.
First, you can use personal loans for just about anything, including medical expenses. Second, Equifax, one of the three main credit bureaus, reports that “medical bills aren’t always set in stone. If you’re facing a medical emergency, you may be able to negotiate medical bills with your doctor or hospital.”
Whether you’re worried about Covid-19 or another medical issue, there are resources out there to help you get the care you need, such as personal loans, which 5% of survey respondents took advantage of during the pandemic.
3. Debt Consolidation
Debt consolidation is when a borrower takes out a new loan and uses the funds to pay down other debts, including credit cards, auto loans, student debt and other personal loans. Because consumers had to tighten their spending and protect their cash flow, some turned to debt consolidation loans to help them save money on unpaid high-interest debts.
Debt consolidation loans move debt from multiple loans to a single loan with one monthly payment. This helps lower your interest rate, streamline payments and otherwise improve loan terms—all aspects people are focusing on during unprecedented times.
For example, let’s say you have three credit cards with the following balances:
- Credit card A: $3,000
- Credit card B: $2,000
- Credit card C: $5,000
With this example, you have a total of $10,000 in debt across three cards with annual percentage rates (APRs) between 16% and 25%. If you choose to take out a debt consolidation loan, you may be able to qualify for a loan with a lower interest rate, such as 8%. Not only will this increase your interest savings over time, but it will also help you pay down your debt more quickly and allow you to manage one monthly payment versus three.
4. Financing a Vehicle
Unless you have a pile of cash lying around, you’ll need to rely on financing to purchase a new or used car. Although auto loans are typically the most common way to finance a vehicle, borrowers can also use personal loans, as shown by the Ipsos-Forbes Advisor survey.
Why would you want to use a personal loan to finance a car? Most personal loans are unsecured, meaning that lenders don’t require you to provide collateral—something of value, such as real estate or a savings account—that secures the loan, and which the lender can repossess in case you fail to repay or default. Plus, personal loans typically don’t require a down payment or set restrictions on the type of car you can purchase.
Auto loans, on the other hand, generally require a down payment and set restrictions on the type of car you can buy, such as cars that are older than 10 years. Plus, the car you’re financing serves as collateral, which means if you fail to repay the loan, the lender can repossess your car. However, auto loans typically come with lower interest rates.
The type of car you want to purchase and the terms you want to receive should determine which financing option is best for you.
5. Auto Repairs
You can’t predict auto repair bills, and if you don’t have an emergency fund, it may be hard to afford them. If you’re hit with a large auto repair bill and find yourself in a pinch, you can use personal loans to help you finance the expense. You could also use a credit card; however, interest rates tend to be higher on credit cards compared to personal loans, which means you’ll pay more over the life of the loan.
For example, let’s say you had an auto repair bill of $1,400. Here’s how much you would pay if you used a personal loan vs. a credit card:
- If you took out a personal loan with an interest rate of 10% and repayment terms of 12 months, you would pay $1,476.99—which includes $76.99 in interest and requires a monthly payment of $123.08—the Forbes Advisor personal loan calculator shows.
- If you used a credit card with a rate of 18% and repaid your balance over the same 12 months, you would pay $1,529—which includes $129 in interest and requires a monthly payment of $139.
The cost savings personal loans bring compared to other financing methods, such as credit cards, may be one reason why Americans chose to pay for auto repairs with personal loans.
Why Americans Aren’t Taking Out Personal Loans During the Pandemic
Americans experienced their first sign of Covid-relief when former President Donald Trump signed the Coronavirus Aid, Relief and Economy Security (CARES) Act—a $2 trillion stimulus package—into law in March 2020. It included direct payments of $1,200 to most American taxpayers. Trump signed a second stimulus package into law in December 2020, which included another round of direct payments—this time worth $600.
While these may have been helpful in the short term, $1,800 is simply not enough to cover the needs of people experiencing ongoing financial hardship—such as months of unemployment.
In a time where many Americans are in dire need of extra cash, you may expect that people would have taken out personal loans—a financing method so flexible that people can use a personal loan for just about any expense, minus higher education costs and home purchases. However, that didn’t happen. The March Ipsos-Forbes Advisor survey shows 76% of people did not take out personal loans.
Here are two possible reasons why Americans didn’t take out personal loans.
1. Lenders Tightened Qualification Requirements
Banks and online lenders typically evaluate a potential borrower’s creditworthiness by evaluating their credit score and history, income, debt-to-income (DTI) ratio and other factors. Most often, lenders require good to excellent credit (670 or more) to qualify, a minimum annual salary of $24,000 and a debt-to-income (DTI) ratio of 36% or less.
However, lenders tend to tighten their personal loan qualification requirements when there’s economic uncertainty. Tighter qualification requirements could have prevented potential borrowers with damaged credit scores or unstable income from qualifying.
While we don’t know exactly how much lenders tightened their requirements, we can expect they would be more strict when reviewing personal loan applications. For example, because of the wave of job loss, lenders likely increased their minimum annual income and credit score requirements to protect themselves from risky borrowers.
2. Borrowers May Rely on Other Sources of Financing
Although personal loans are a common source of financing, there are other ways to secure funding, including:
- Credit cards. Credit cards are a convenient way to access funds up to your credit limit. You can reuse your available credit as you repay your balance; any unpaid balances at the end of the month will accrue interest until fully repaid. The best credit cards offer rewards and perks like no-interest financing, which may make them more attractive than a personal loan.
- Personal line of credit. A line of credit lets borrowers draw money on an as-needed basis, compared to a personal loan that offers the funds as a lump-sum amount. You only pay interest on the money you borrow and are responsible for making regular payments to cover both the principal and interest.
- Home equity loans. People with plenty of equity in their home—which is the home’s current market value minus the loan balance—can take out a home equity loan and receive a lump-sum payment. The best home equity loans let homeowners borrow up to 85% of their home equity.
- Home equity line of credit (HELOC). HELOCs are revolving loans that homeowners can take out, using the equity in their home as collateral. Homeowners can borrow up to 80% to 85% of their home equity and use the funds on an as-needed basis. Borrowers only pay interest on the funds they draw down from their credit line.
- Family and friends. Some people may be able to borrow money from family and friends. While this can be a handy way to get money if you can’t qualify for another source of financing, it comes with its own risks. People who take this route should outline the repayment terms and interest rates, if any, to make sure everyone understands their rights and responsibilities.
All figures, unless otherwise stated, are from Ipsos. The total sample size was 927 adults. Fieldwork was undertaken between March 16-17, 2021. The survey was carried out online. The figures have been weighted and are representative of all U.S. adults (aged 18+).