Personal Loans 101: Empowering Financial Flexibility

Capital Markets Team

September 1, 2023

3 min read

In today's ever-changing financial landscape, personal loans have emerged as a versatile and powerful tool that empowers individuals with flexible financing options. Unlike other loan products, such as mortgages and auto loans, which serve specific purposes, personal loans offer a wide range of use cases, making them a popular choice among consumers seeking tailored borrowing solutions.

Meeting Diverse Borrowing Needs

Personal loans have earned their reputation as one of the most versatile loan products in the market because they fulfill a multitude of financial needs. Some of the most popular use cases for personal loans include:

  • Credit card refinancing: High-interest credit card debt can quickly become a burden for many individuals. Personal loans offer a solution to this problem by allowing borrowers to consolidate multiple credit card balances into a single, fixed payment with a lower interest rate.

  • Debt consolidation: Managing multiple debts can be overwhelming and costly. Personal loans enable borrowers to combine various debts, such as credit cards, medical bills, or other unsecured loans, into a single, more manageable payment.

  • Home improvement: Homeowners looking to renovate or upgrade their homes can use personal loans to fund these projects without tapping into their home equity.

  • Major purchases: Whether it's a wedding, a dream vacation, or purchasing expensive electronics, personal loans offer a quick and accessible way to finance significant expenditures.

  • Moving expenses: Relocating can be expensive, and personal loans can be a lifeline for those in need of financial assistance during a move.


Benefits to Lenders

Personal loans not only serve borrowers well but also provide numerous benefits to lenders and their portfolios. Some advantages include:

  • Shortening duration: Personal loans typically have shorter terms compared to other types of loans. This can positively impact a lender's portfolio by reducing the overall loan duration and minimizing potential risks.

  • Improving net interest margin: The interest rates on personal loans are often higher than those on traditional savings accounts, which can boost a lender's net interest margin and enhance profitability.

  • Diversifying income streams: By offering personal loans alongside other financial products, banks can diversify their income streams and reduce reliance on specific loan types.

  • Asset growth and portfolio expansion: Successful management of personal loan portfolios can lead to overall asset growth for a lender and contribute to the expansion of their financial offerings.

With benefits that extend to lenders as well, personal loans have become an essential component of today's financial landscape.


A Win-Win Solution:

When used responsibly, personal loans can be a win-win solution for both lenders and their customers. For example, by consolidating multiple high interest credit card balances into one fixed payment, the borrower transitions from revolving credit to installment credit with a fixed monthly payment and a known payoff date. This displays a borrower’s willingness to repay in a shorter time frame and enables the borrower to better control their credit profile.

By offering affordable credit solutions, financial institutions empower individuals to improve their financial health while simultaneously creating a positive impact on their own portfolio.