Nearly 4 in 10 Struggling Consumers Have Turned to Personal Loans. Here's Why That Is -- and Isn't -- a Good Thing

Personal loans may be popular. But should consumers be rushing to sign them?

These days, many people are struggling in the wake of rampant inflation. With everything from gas to groceries to utilities costing more, consumers are being forced to make some difficult choices -- including racking up debt just to make ends meet.

In June, 38% of consumers who were having a hard time paying their bills turned to personal loans as a means of borrowing in a pinch, according to a recent J.D. Power survey. And while that's a good thing on the one hand, it's also not ideal.

Why turning to personal loans is a good thing

Consumers who have turned to personal loans over the past number of months may have spared themselves a world of financial pain by opting for these loans over credit card balances. In fact, one major benefit of personal loans is that they tend to charge lower interest rates than other borrowing options. And they can be considerably more affordable than credit card debt.

Plus, consumers can wreck their credit scores by virtue of having too much credit card debt -- even if they're consistently keeping up with their monthly payments. A personal loan balance won't be a major source of credit score damage if payments are made on schedule. (In the course of applying for a personal loan, consumers might see a minor hit to their credit scores following a hard inquiry, but this holds true any time someone seeks to borrow.)

Why turning to personal loans is a bad thing

Personal loans may be a relatively affordable way to borrow. But it's troubling that consumers are relying on them to make ends meet.

What’s more, any time consumers take on debt, they run the risk of falling behind. And those who don't make their personal loan payments on time risk severe credit score damage.

Also, while personal loans don't usually charge as much interest as credit cards, they charge interest nonetheless. For something like a home renovation project, it's easy to get on board with the idea of paying interest because there's an ultimate benefit involved. But having to rack up interest in the course of covering everyday bills is no doubt a much harder pill for struggling consumers to swallow.

When will living costs start to ease up?

Inflation has been soaring for many months, and living costs could easily remain high well into the latter part of 2022. In fact, it's hard to say when inflation will start to ease, because while the Federal Reserve is trying to help matters by raising interest rates, it's too soon to know when that will directly impact inflation levels.

Also, while the Fed is hoping higher interest rates will prompt consumers to cut back on spending, those rate hikes could also make personal loans cost more in the coming months. And that's not a great thing.

Consumers who find themselves unable to keep up with their expenses can consider turning to a personal loan if circumstances warrant it. But let's hope fewer people have to resort to that going forward.