Is now a good time to take out a personal loan?
We sat down with OneMain Financial’s chief risk officer to talk about borrowing amid the COVID-19 pandemic.
With record unemployment rates and government assistance programs that often aren’t enough, Americans across the country are wondering how to cover their bills during the coronavirus outbreak. Some are even considering taking out a personal loan to cover expenses they can’t put on hold, like groceries, insurance and rent.
While a personal loan can help you save if you’re struggling with high-interest credit card debt, it might not be a good option for everyone. Taking on debt to pay off this month’s bills will only add to your expenses in the coming months and could land you in a worse situation than you were in before.
It can also be harder to get a personal loan now than it was before COVID-19 hit, thanks to the shaky economy.
We spoke with Richard Tambor, chief risk officer at OneMain Financial, about the state of the lending market and whether now is a good time to take out a personal loan.
“If now feels like a good time to do debt consolidation and put yourself in a place where you can have clear visibility to paying off your debts or fixed-term loans, then it’s a great time to take out a loan,” Tambor tells Finder.
“But if you’ve got lots of personal uncertainty in terms of your job or your health or anything else, then maybe it’s not. But each situation is unique.”
Choose the right type of lender for your credit score
If you think a personal loan could help, think about what type of lender you want to apply with. Different types of lenders can benefit different types of borrowers.
For example, borrowers with good to excellent credit — usually a score of 670 or higher — can often find the most favorable rates and terms with a bank.
But if you have fair credit — a score between 580 and 669 — you might have an easier time qualifying with an online lender.
Beyond fair credit, we asked Tambor who the ideal borrower is to get a good rate on a OneMain personal loan.
“Our customer segment — we’ll call them nonprime, hard-working Americans,” says Tamber.
“So if you just look at the profile of our customers, they really look like mainstream America: Average age in their 40s, they have stable employment, stable time at their homes, credit files, bank accounts, but at some point in their past, they may have had a credit issue.”
Be prepared for stricter eligibility requirements
But even if you were able to qualify for a personal loan before the pandemic hit, that might not be the case now.
Due to unstable employment throughout the country, income is no longer a reliable indicator of whether a borrower can afford to pay back their debt.
And with many Americans taking advantage of deferment and forbearance programs on their student loans, car loans, credit cards and other bills, lenders expect a wave of defaults once repayments kick in again.
If this happens, they stand to lose a lot of money.
This has caused some lenders to use stricter eligibility requirements and offer fewer loans. We asked Tambor how this is affecting the lending market.
“There’s really two dominant features of what’s happening in the lending market right now. One of them is that most lenders have pulled back,” Tambor tells Finder.
“Virtually everybody that I know has pulled back credit because of the incredible uncertainty in the environment. Unemployment rates have gone up into double digits and over 40 million people have filed initial claims for unemployment. That’s a lot of uncertainty, and lenders are not people who love uncertainty. We and everybody else have pulled back. So that’s feature number one.”
“Feature number two is — and I can’t say that I fully anticipated this — but consumer demand really pulled back,” says Tambor.
“It pulled back hard in March and April, where I think the shock of the pandemic and the shutdown of the economy, and the uncertainty for consumers and fear caused consumer demand to drop off.”
“So rather than consumers going out and saying, ‘Hey, I better get some more cash and take on new loans,” consumers went the other way and said, ‘I’m just not going to look for credit.'”
How to decide if it’s right for you
Even with the changing lending market, there are still a few steps you can take to help you decide if a personal loan is the right choice.
Check your credit report and go over your budget to get an idea of how much you can afford to pay each month. If your credit score is below 580, or you don’t have much wiggle room, you could have a hard time qualifying.
And exhaust your other options before you decide to take on more debt. For example, if you’re struggling with medical debt, try negotiating the cost with your provider or asking for an interest-free payment plan.
Some local governments also have financial assistance programs for people who have lost income due to the coronavirus outbreak. If you can qualify for one of those, a loan might not be necessary.