When big names in the financial services industry – including mortgage lender Quicken Loans and New York-based investment bank Goldman Sachs – enter a niche market for online personal loans, it’s fair to say that consumers can bank on more buzz for simple, quick-cash fixes.
Marcus by Goldman Sachs had a limited rollout in October and now is marketing a plan for Americans nationwide to get out of credit card debt. Marcus – yes, the name of one of the firm’s founders, Marcus Goldman – is offering no-fee personal loans of $3,500 to $30,000. The loans are a product of Goldman Sachs Bank USA.
RocketLoans, which is part of the Quicken Loans family of companies, launched a year ago by offering unsecured personal loans of $2,000 to $35,000.
Online personal loans are pitched as a way to help consumers consolidate high-interest credit card debt or as a strategy for financing expenses – such as major car repairs or a child’s braces.
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“Tens of millions of families feel like they’re drowning financially – and many are steering clear of credit cards,” said Rohit Chopra, senior fellow at the Consumer Federation of America.
But these loans aren’t a low-cost, quick fix for everyone. Often, you’d need good to excellent credit to qualify – say, starting with a credit score of 640 – and the rates could be in the single digits or double digits, depending on your credit profile and other factors.
“These are not being peddled to anyone with a pulse – at least not yet,” Chopra said.
Even so, some creditworthy consumers may find these loans attractive. They could appeal to consumers who are financing a one-time major purchase, for example. Instead of putting an engagement ring on a credit card, Chopra said, maybe you’d take out a personal loan.
Todd Lunsford, CEO of RocketLoans, said personal loans can appeal to consumers who are renters and do not have home equity. Or some consumers find applying for a personal loan easier than the time-consuming process of applying for home equity credit.
“There’s not a delay to do appraisals,” Lunsford said.
Since the financial crisis and the massive number of foreclosures, many consumers may be less willing to take on the risk of borrowing against their homes, as well. So this product could fill that gap.
Financial service companies, no doubt, are seeing that creditworthy customers are more plentiful.
“American households have been cautious borrowers since the Great Recession,” said Mark Zandi, chief economist for Moody’s Analytics.
“Debt burdens are at record lows, house prices and stock values are at record highs, and given low unemployment, wage growth is accelerating,”
For major mortgage players such as Quicken, personal loans could be a growth opportunity, given that mortgage refinancing activity will fall off sharply as mortgage rates rise, Zandi said.
Online personal loans are marketed by a variety of outfits, from upstart lenders, such as the Lending Club and Prosper, to traditional players, such as PNC Bank and others. Some banks and credit unions offer personal loans in branches but don’t have online platforms for applying for them.
Experts note that some negative headlines hit in 2016 after the Lending Club struggled with loan quality and cost concerns. Lenders such as Prosper, Lending Club and SoFi offer a peer-to-peer lending platform to connect borrowers to investors.
But some traditional players may sense an opportunity here, as more consumers appreciate the opportunity to deal with their financial challenges online.
The online platform favors quick loan approvals.
Marcus by Goldman Sachs, for example, says its typical approval process can take less than an hour, though in some cases, it can take more than a day.
For consumers, however, a key point to understand is that unsecured personal loans aren’t an option for those who have bad credit or no income. Marcus by Goldman Sachs, for example, notes that it is targeting consumers with good or excellent credit, starting with a 660 FICO score (Marcus accepts applications in all states except Maryland.)
RocketLoans requires a minimum credit score of 640 and a minimum annual income of $24,000 to see if the lender can generate a loan offer. (It does not offer its product in Nevada or Iowa.) Lunsford noted that about 30 percent to 40 percent of applicants are approved at RocketLoans.
Finding the right fit is important. Some consumers who have strong credit and a plan to repay their debt quickly might be better off using a balance transfer to a credit card offering an introductory 0 percent rate for 12 or 15 months. Or, some consumers who need a large amount of money – and have equity in their homes – might get a lower rate with a home-equity loan if they’re willing to take the time to go through the process.
If you’re shopping for an unsecured personal loan, experts say, it’s best to fully understand the product and compare options early in the game. Once you apply for the loan, it can ding your credit score.
Look at your budget. Consider if you could handle the monthly payments involved with three- or five-year loans. As an example, Marcus by Goldman Sachs notes online that a $14,000 loan with a 12.99 percent APR and 48 monthly payments would have a monthly payment of $375.52.
The length of the loan and the annual percentage rate will vary based on credit history. Rates might start out as low as the 5.7 percent range, then climb into the double digits.
Marcus by Goldman Sachs loans are available for terms of two years to six years, which can offer some flexibility with setting a monthly payment amount. The RocketLoans offers two loan options – either three years or five years.
You cannot use unsecured personal loans from Marcus, RocketLoans and others to refinance a student loan.
The rate on a personal loan often will be higher than that for a car loan or mortgage, which is backed by the car or the house. On the plus side, a fixed-rate personal loan can be lower than some credit card rates.
PNC Bank offers personal loans of up to $25,000 and rates start at 5.99 percent. But such a low rate only goes to the most qualified applicants. Marcus by Goldman Sachs, for example, has a range that runs from a fixed 5.99 percent annual percentage rate to up to a fixed 22.99 percent APR, depending on the borrower’s creditworthiness. RocketLoans offers APRs ranging from fixed rate of 5.7 percent to 28.7 percent – with the average APR being 17 percent.
“It is risk-based pricing,” said Lunsford.
In addition, review what fees might be charged, such as origination fees or late fees. The origination fee at RocketLoans, for example, varies based on risk-based pricing and ranges from 1 percent to 5 percent of the loan amount.
Christopher Devan, senior vice president for auto and personal lending products for PNC Bank in Pittsburgh, said personal loans are available in days, not weeks. They simplify the lending process and can help consumers who need cash in a shorter time frame.
Because many products are now online, it can be worthwhile to take time to review what’s out there.
“New market entrants have meant greater credit availability and lower rates for a product that was only sparsely available at traditional retail banks previously,” said Greg McBride, chief financial analyst for Bankrate.com.
Dustin Cohn, head of brand and marketing communications for Marcus by Goldman Sachs, said many consumers aren’t even aware that they can consolidate credit card debt with a personal unsecured loan.
Harit Talwar, managing director for Marcus by Goldman Sachs, said research has shown that many consumers aren’t juggling credit card debt because they went on some unreasonable spending sprees. “They have built up this debt because of life’s moments,” Talwar said.
The ad campaign for Marcus by Goldman Sachs centers on the theme: “Debt Happens: It’s how you get out that counts.” A commercial on YouTube features a puppy that chewed up the couch, leading the family to buy another couch on a credit card and then there are other calamities.
A simpler online lending platform, of course, doesn’t mean you need to cut corners and rush into anything, even if your life has included more than one or two bad dogs.
Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at email@example.com.