The Rise of the Personal Loan: A Lifeline or a Debt Trap?
American consumers are increasingly turning to personal loans as a way to manage mounting debt, particularly high-interest credit card balances. This trend, fueled by rising costs for everyday necessities and a widening economic divide, is reshaping the consumer credit landscape. Credit card balances hit a record $1.28 trillion at the end of 2025, according to the Federal Reserve, prompting many to seek alternative financing options.
Personal Loans as a Refinancing Tool
Personal loans are rapidly becoming the “middle-class refinancing option,” as Jim Triggs, CEO of Money Management International, puts it. TransUnion forecasts that unsecured personal loan originations will drive consumer credit growth in 2026, increasing 5.7% compared to last year. This growth is expected to outpace new mortgages, credit cards and even auto loans.
The appeal is straightforward: consolidating multiple debts into a single loan with a potentially lower interest rate. Fintech lenders like LendingClub and SoFi have made this process easier and faster, now holding a 42% share of personal loan originations – up from about one-third a year earlier.
The Subprime Surge and the K-Shaped Economy
However, the growth in personal loan demand isn’t coming from the most creditworthy borrowers. Subprime borrowers – those with credit scores under 600 – are increasingly driving this trend. TransUnion expects subprime borrowers to account for roughly 40% of personal loan originations this year, a significant increase from 32.5% in the third quarter of 2025.
This surge is linked to the “K-shaped economic split,” where higher-income individuals have more financial flexibility, including access to lower-interest home equity lines of credit. Those with limited financial resources are left with fewer options, often relying on personal loans to stay afloat.
Are Personal Loans Actually Saving Consumers Money?
While personal loans are often marketed as a debt consolidation solution, the reality is more nuanced. The average rate on a personal loan in mid-February was 12.15%, compared to 19.6% for a credit card. However, subprime borrowers often don’t qualify for these lower rates. They may end up paying rates as high as 24% or 30% on a personal loan, offering limited relief.
a fixed repayment schedule of three to five years doesn’t necessarily address the underlying spending habits that led to debt accumulation. Consumers may consolidate their credit card debt with a personal loan, only to run up their credit card balances again.
Household Debt: A Broader Perspective
The rise in personal loan originations is part of a larger trend of increasing household debt. Total household debt increased by $191 billion in the fourth quarter of 2025, reaching a new high of $18.8 trillion. Alongside credit card and personal loan growth, auto loan balances also edged up by $12 billion to $1.66 trillion, and other balances (including retail cards and consumer finance loans) rose by $14 billion to $564 billion.
Frequently Asked Questions
Q: What is a good credit score for a personal loan?
A: Generally, a credit score of 670 or higher will qualify you for better rates on a personal loan. However, some lenders specialize in loans for borrowers with lower credit scores.
Q: What are the risks of consolidating debt with a personal loan?
A: The main risk is that you may not address the underlying spending habits that led to debt. You could also end up paying more in interest if you don’t qualify for a significantly lower rate.
Q: Are there alternatives to personal loans for debt consolidation?
A: Yes, options include balance transfer credit cards (with introductory 0% APR periods), debt management plans through credit counseling agencies, and home equity loans or lines of credit (if you own a home).
Q: What is the K-shaped economy?
A: The K-shaped economy refers to a situation where different segments of the population experience vastly different economic outcomes. In this case, higher-income individuals are thriving, while middle- and lower-income individuals are struggling.
Did you know? Total credit card balances rose by $44 billion during the fourth quarter of 2025 alone.
Have you considered exploring debt counseling services? Share your thoughts and experiences in the comments below. For more information on managing your finances, explore our articles on budgeting and saving.
