When a recession hits, it’s best to be as prepared as possible for the financial ramifications that will ensue. There are many ways to become prepared, of course, such as: tightening your budget, setting up an emergency fund, and diversifying your investment portfolio.
One of the most crucial precautions a consumer can take, when a recession is looming, is managing and eliminating their debt. Paying off high-interest debt (e.g., credit card debt) is always important, but is especially vital for freeing up cash flow in an event where your income may drop, while your necessary expenses may increase.
Using a Personal Loan for Credit Debt
For consumers worried about the effect of mounting credit card debt during a recession, a personal loan can provide several potential benefits by (link: /learn/about-loans/how-do-personal-loans-accommodate-debt-refinancing-and-consolidating text: consolidating multiple debts or simply refinancing) the debt on one high-interest card. For starters, using a personal loan to pay off a credit card balance eliminates revolving debt, which lowers your (link: /learn/about-creditcards/the-importance-of-keeping-a-low-credit-utilization-ratio text: credit utilization ratio). A high ratio, which is the percentage of your credit balance compared to your credit limit, can lower your credit score and make it (link: /learn/about-creditcards/4-consequences-of-bad-credit text: difficult to apply) for financial services, jobs, leases, and other life necessities.
When it comes to repaying the actual personal loan, a consumer can benefit from a lower interest rate compared to that of their credit card account, as well as lower monthly payments. While interest rates for credit cards continue to go up, the gap is increasing compared to the typical rates offered for personal loans. Since most personal loans are unsecured debt, consumers also won’t need to put an asset (like their home or car) up for collateral, which is vital during a recession.
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The Power of Fintech
Personal loans are also widely accessible online, thanks to developments in fintech that make it easier to get matched with offers from top providers. Fintechs (i.e., online-only lenders) account for (link: newsroom.transunion.com/fintechs-continue-to-drive-personal-loans-to-record-levels/ text: nearly 40% of personal loan balances), with more than 20 million Americans having unsecured personal loans — double the number from 2012. Fintech sites like (link: /products/loans text: Fiona) allow consumers to compare loan offers based on creditworthiness and get pre-approved offers through only a (link: /learn/articles/understanding-the-benefits-of-a-soft-credit-pull text: soft credit pull), with no effect to their credit score.
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While a personal loan can be advantageous for consumers looking to tackle debt during a recession, it should still be used in unison with other responsible financial behavior. Delinquency rates on personal loans are fairly low, however, consumers still need to make sure they aren’t racking up additional credit debt while they pay off their personal loan. When used responsibly, a personal loan can help ease some of the financial burden of a recession, while also building your credit score through timely payments.
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