Loans.org analyzes demographics of 1,900 personal loan applicants

In an in-depth analysis of personal loan applications, loans.org found that more than half of applicants have poor credit scores ranging below 640.

Cesar Diaz, founder and CEO of loans.org, said that it is important to provide several borrowing options for borrowers of all credit scores, income levels, and ages.

“Being able to provide personal loans for all types of borrowers is a vital element of the lending industry,” he said.

Loans.org analyzed online applications from over 1,900 potential borrowers across the United States. The applications were from December 2012 to July 2013. Our analysis reviewed the age, loan purpose, loan amount, credit quality, employment status, and yearly income of each applicant.

Some of the most significant findings of our analysis were:

• The average yearly income of applicants is $46,708.55.
• One-quarter of applicants requested a loan to cover debt consolidation costs.
• Nearly 8 out of 10 applicants are between 18 and 44 years old.
• The most common loan amount is $2,000.
• 81 percent of applicants are employed.

Poor Credit Scores Dominate

A credit score is one of the most important factors when applying for a new personal loan. Despite the fact that a majority of the loans.org applicants are employed, more than half admit to having poor credit scores. Poor credit is deemed at a score below 640. Fair credit scores are between 640 and 699, good credit is from 700 to 760, and excellent credit is anything above 760.

This finding signifies that despite having a job and a way to repay a personal loan, over half of applicants are rejected from most traditional forms of borrowing because of a low credit score. Alternative methods for short-term loans enable applicants to access cash when it is needed the most.

Andrew Schrage, founder and CEO of MoneyCrashers, said the report’s statistics about applicants’ credit scores and average income levels is expected.

“Those with low credit scores pay more in interest which affects their finances and causes the need for outside financing,” he said.

Only 1 in 10 personal loan applicants had credit scores above 700. Personal loans are usually unsecured, meaning that they are not linked to any form of collateral. Adding collateral to a loan, such as with an auto title loan, gives the lender profitable security to repossess if the loan is unpaid. Applicants with higher credit scores were less likely to choose an unsecured and high interest personal loan.

Yearly Incomes Higher Than National Average

In addition to having a stable source of income, personal loan applicants reported annual incomes which were higher than the national average. According to the Social Security Administration, the average yearly income is $42,979.61 but we found that personal loan applicants had an income that averaged $3,728 higher.

Yearly income statistics for personal loan applicants:

• Average Income: $46,708.55
• Mode Income: $20,000
• Median Income: $27,000

However, it is important to note that the mode and median income levels are significantly lower than the average. The median yearly income is $27,000 and the mode income is $20,000. This means that a small group of applicants with larger incomes offset the overall average.

According to Grant Cardone, sales expert and author, the middle class is becoming non-existent and the data proves this fact.

“The median income is just above the poverty level for a four person family,” he said. “Each time the news comes out talking about how unemployment numbers are improving, I point out that it is a false sense of security.”

Average Loan Amounts Significantly Higher Than Mode

Personal loans are a common form of short-term credit. Since they are usually unsecured loans, the amount requested is small and only ranges from several hundred to several thousand dollars.

Our report found that the average loan amount was significantly higher than the most commonly requested number.

• Average Loan Amount: $4,423.63
• Mode Loan Amount: $2,000
• Median Loan Amount: $2,500

The most requested amount of money is $2,000. Multiple applicants requested amounts higher than the mode, which offset the average amount.

As shown by the loan amounts, borrowers of personal loans are looking for a small amount of money to cover unexpected. Personal loans are rarely of large amounts for extravagant reasons.

Josh Caldwell, a professional real estate investor, said he is surprised at the low amount requested by borrowers. He borrows personal loans frequently from qualified investors and uses the funding to purchase, rehab, and flip properties.

Caldwell said the small loan figures illuminate that borrowers are likely using these “capital infusions to stop-gap their finances,” which, he said, is bad debt.

“They are borrowing for consumption rather than revenue producing events,” he said.

Debt Consolidation is a High Priority for Borrowers

Personal loans are requested for many different purposes. Loans.org provides 14 different categories for borrowers to select when applying for a new loan. The most common reasons for taking out a personal loan are other (27%), debt consolidation (25%), household expenses (17%), auto (8%), home improvement (5%), and medical/dental (5%).

Beyond the most frequent “other” category, the second highest reason borrowers apply for personal loans is to begin debt consolidation. One in four applicants requested a loan for this purpose. Debt consolidation can assist borrowers with multiple loans by lumping these bills together into one single payment.

Several of the remaining loan categories surround life situations that are usually unplanned. Items such as household expenses, home improvement, and medical/dental are all items that can arise and cause a financial strain on consumers. For many borrowers, personal loans are an easy and quick way to access cash to fix the emergency or medical bill.

Cardone is worried over the fact that household expenses are near the top of the list because it signifies that borrowers live above their means.

“Most Americans do not put enough of their earnings aside to handle issues such as leaky roofs and other repairs that come up,” he said. “It is financially unhealthy to live so close to the edge with no cushion.”

One loan category, despite having a low average, signifies a hole in another sector of the lending industry. The prevalence of borrowers who requested personal loans for business purposes is significant. Although only 2 percent of applicants chose business as a reason for needing a personal loan, it shows that business borrowers must search outside of regular commercial lenders to finance their companies.

Few lenders approve business loans for start-ups or existing companies that lack sufficient capital as collateral for a loan. This leaves many small and new businesses without the capital needed to expand. Personal loans are a common outlet for these organizations. Out of the 1911 applicants, 29 applied for business-related purposes.

Most Borrowers Fall Within 18-44 Age Range

Another element that the report analyzed was the age ranges of applicants. In addition to a borrower’s income level and loan purpose, the age of each applicant is a revealing statistic. Loans.org found that personal loan applicants are young, in their 20s and 30s.

Nearly 8 out of 10 borrowers fall within the 18-to-44 age range.

Schrage is not surprised that the majority of applicants belong to this age category.

“This group has struggled to manage financially, especially since the economic downturn,” he said. “The main reasons younger folks need money are for student loans or to pay off credit card debt.”

The most common age range is from 25 to 34 years old. This 10-year range accounts for 31 percent of all loan applicants in our report.

The second largest age range is for young applicants between 18 and 24. This age group is typically composed of college students, high school graduates, and young professionals. Although this age group is working on establishing their working career, very few are established financially.

Only one in five applicants fell within the age ranges past 45 years old.

The smallest age range, 65-74, represents recent retirees. This age group is less likely to borrow personal loans likely because of a recent retirement and a monthly Social Security check.

Majority of Applicants are Employed

After analyzing the online applications, Loans.org found a high prevalence of employed applicants. Eighty-one percent of applicants were employed, and only 5 percent were unemployed. The remaining group was either self-employed (5 percent) or responded that they had other forms of employment (9 percent).

Despite stereotypes that borrowers of short-term credit are unemployed or out of their working years, we found that nearly all applicants had a method to repay their personal loans in the near future.

Diaz said that it is surprising to see the amount of new personal loan applicants with stable sources of income.

“This not only helps ensure that borrowers can repay their debts, but it also contradicts mainstream opinion that personal loan borrowers are largely unemployed and financially unhealthy,” he said.