Personal loans can be a great option for many people, so borrowers across all credit score levels, even those with the highest scores, regularly turn to them to help finance costly expenses. But how those funds are used can vary significantly, especially when comparing individuals in more financially stable positions to those with lower credit scores.
To parse out these differences, LendingTree researchers reviewed personal loans closed on our platform between April 2021 and March 2022 to see how people with high credit scores are using them. They then compared those findings to those of borrowers with low scores. (In this study, we define a high credit score as 720 and above.)
Among their discoveries, our researchers found that, much like lower credit score borrowers, those with high credit scores primarily use personal loans to consolidate debt; they just borrow at levels that far exceed those of the lower score group. And yet, those loan amounts aren’t even the highest they take out: Home improvements and business loans typically claim more.
Read on to learn more about how high-credit score borrowers are using their personal loans.
- Borrowers with credit scores of 720 and above take out personal loans that average far higher than those taken out by people with lower credit scores. Personal loans for high-score borrowers average $18,443, which is 122.2% higher than the $8,301 average for those with scores below 720.
- The majority of personal loans for high-score borrowers are for debt consolidation, but that’s not where they’re spending the most. 39.7% of high-score borrowers take out personal loans that average $19,991 to consolidate debt. However, the 12.8% borrowing for home improvements take out an average of $21,510.
- Lower-score borrowers (below 720) are taking out a higher percentage of personal loans in categories that indicate more immediate needs. For example, medical expenses account for 3.6% of closed loans among low-score borrowers, versus just 1.9% among high-score borrowers.
- High-score borrowers are least likely to take out personal loans for medical bills, moving and relocation, business expenses and vacations or weddings, but when they do, they go big. Only 1% of high-score borrowers took out vacation or wedding loans, while moving/relocation and business loans tied for second least used at 1.5%. However, the largest loans taken out by these borrowers (an average of $22,778) were for business purposes.
Borrowers with high credit scores take out loans 122% larger than those with lower credit scores
Those with credit scores of 720 and higher tend to take out personal loans that average far higher than those taken out by people with lower credit scores. More precisely, high-score borrowers average $18,443 in personal loan amounts, a whopping 122.2% higher than the $8,301 average amount taken out by consumers with scores below 720.
However, these lower amounts typically aren’t by choice; in many cases, lenders will restrict loan amounts for those with lower credit scores, and then offer them extremely high APRs.
A high credit score indicates that you’ve done a good job managing and repaying debt in the past, which can make lenders confident that you’ll handle repayment well in the future.
“Higher-income consumers also tend to have higher credit scores than folks with lower incomes,” Schulz says. “That combination of high income and high score makes banks feel much better about lending those groups of people larger sums of money.”
Nearly 40% of high-score consumers use personal loans for debt consolidation
Interestingly enough, despite topping the list of loan uses, debt consolidation isn’t where high-score consumers take out the largest loans. More is taken out for home improvements, with an average of $21,510 borrowed, compared with $19,991 for debt consolidation.
Credit card refinancing, the No. 2 reason for taking out personal loans among this group, saw high-score individuals borrowing an average of $17,625 (with an average APR rate of 8.18%).
These numbers shouldn’t be surprising, Schulz says. Even though home remodels. whether in the kitchen, bathroom or elsewhere, can be extremely expensive, they typically work out to be a good investment.
Still, debt consolidation remains the biggest reason driving people to get a personal loan for very good reasons, Schulz says.
“Personal loans are an amazing tool to help people not only save money but to streamline their finances,” he adds. “Dealing with just one debt payment each month rather than four or five separate ones is a pretty big deal, which is why people of all kinds use them that way.”
Low-score borrowers are more likely to use personal loans to cover bills and basic needs
Though paying off debt also tops the list of personal loan uses for lower credit borrowers (37.7%, compared with 39.7% of high-credit score individuals), those with credit scores below 720 use personal loans far more often to pay for immediate personal needs than those with high credit scores.
According to Schulz, this is likely because higher-income Americans have the luxury of handling debt differently than individuals with lower incomes.
Lower-income Americans aren’t that fortunate. Often, they take on debt simply because they have to; they need that personal loan to help them make ends meet and pay their bills. As a result, undertakings like home improvements must fall lower on the priority list.
The LendingTree research bears that out: Just 5.7% of personal loans taken out by lower-score borrowers (at an average amount of $10,114) are used toward home improvements, compared with 12.8% of personal loans taken out among high-credit borrowers (at an average of $21,510).
High-score borrowers are less likely to take out loans for weddings, business, but go big when they do
Aside from more immediate needs like medical bills, high-score borrowers are also much less likely to take out loans for vacation or wedding expenses (only 1%), moving and relocation (1.5%) and business (1.5%).
But when high-score borrowers do take out these loans, they go big and ask for more than double the amount of most other borrowers: an average of $22,778 for business-related expenses, compared with the $9,068 that non-high score individuals took out; an average $13,764 for vacations or weddings, versus $5,770 for non-high score borrowers; and for moving and relocation, they received $10,982, compared with $4,548 for the latter group.
But the fact that they borrow high when they do take out these loans doesn’t surprise Schulz either.
“To a degree, it’s about access,” he says. “Folks with lower credit scores might not be able to borrow as much as folks with high credit scores, in part because high-income individuals tend to have higher credit scores than those with lower incomes. That combination of high income and high score typically adds up to bigger loans.”
By the numbers
Tips on how to take out a personal loan
If you’re in the market for a personal loan, whether it be for debt consolidation or medical expenses, here are a few tips on how to pursue one:
- Get your credit score up: The higher your credit score, the more likely you are to not only get approved for a personal loan, but also have access to lower interest rates. You can improve your credit score by paying down any current debt you have, making sure you’re current on all your bills and checking your credit report for any errors or fraudulent activity.
- Check if you prequalify: While many lenders allow you to see if you prequalify for a loan, some lenders will have you go through a hard-credit inquiry before allowing you to see your available rates and terms if you qualify. A hard-credit inquiry will negatively impact your credit score and show up on your credit report, whereas a soft-credit inquiry (prequalification) won’t. However, if you decide to go through with a personal loan, you’ll have to submit to a hard-credit pull before receiving the funds.
- Compare multiple offers: As with any large purchase, it’s important to shop around and compare what’s on the market when looking to take out a personal loan. By prequalifying and comparing personal loan offers, you’ll be able to check for the best proposals without harming your credit score. You can compare offers on the LendingTree personal loan marketplace.
LendingTree analysts reviewed personal loans closed on the LendingTree platform between April 1, 2021, and March 31, 2022, to determine the percentage of loans taken for various purposes, as well as the average loan amounts and APRs for those personal loans.
For this analysis, high-score consumers are defined as those with credit scores of at least 720.
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