Borrowing for Emergencies and Moving Rose in 2020

NerdWallet data shows what was on some consumers' minds when getting a personal loan during a chaotic year.
Annie MillerberndMar 11, 2021

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Some consumers’ financial priorities — including why they borrowed money — changed last year during the economic downturn caused by the COVID-19 pandemic.

According to anonymized NerdWallet member data, the most and least popular reasons for getting a personal loan remained roughly the same, but borrowing for emergency expenses and moving increased while the percentage of borrowers who said they wanted a debt consolidation loan decreased.

Uncertainty about the economy tamped down demand for all kinds of credit, says Rich Tambor, chief risk officer at lender OneMain Financial.

“In particular, in the second quarter when people were looking into the abyss and nobody knew what was happening, people just got conservative,” he says.

You can use a personal loan for almost anything. When you pre-qualify to see potential loan offers, a lender asks for information about you, such as your income and address — and they ask for information about the loan you want, like the amount and reason. NerdWallet also collects this information to pre-qualify you with multiple lenders at once.

Here’s how those reasons changed from 2019 to 2020, according to data from NerdWallet members who pre-qualified for a personal loan and received a loan offer.

Emergency borrowing ticks upward

Borrowing money for emergency expenses grew the most of any loan purpose from 2019 to 2020, according to NerdWallet’s pre-qualification data. While about 6% of pre-qualified members said they wanted to borrow for an emergency in 2019, nearly 11% gave that reason in 2020.

Consumers who didn’t have an emergency fund when the pandemic hit were left vulnerable, says Brian Walsh, online lender SoFi’s senior manager of financial planning. They did what they had to in order to get through a financial emergency — whether it was using a personal loan, credit card, home equity or a retirement plan.

“It was just ‘how can we limit the damage from a long-term financial perspective of trying to get by?’” he says.

Emergency loans are one option if you need cash fast, but there may be cheaper alternatives to consider in a crisis.

For example, a friend or family member could lend you the money interest-free. You might also consider a second job to bring in extra cash or get assistance from local nonprofits that can help cover essential living expenses.

More moving loans

Of those borrowers who pre-qualified in 2019, only about 2.5% chose moving as the reason for their loan. That number increased by about a full percentage point in 2020.

That’s not a large percentage, but it’s a notable change for a year when many Americans started working from home full time. By fall, some companies had loosened their in-office mandates in favor of flexible schedules or full-time remote employees.

Similar to emergency borrowing, personal loans aren’t always the best choice for financing a move. But if you have to borrow to pay for the move, Walsh says where to get the funds may not be the right first question.

“If you don’t have the cash to cover a move, is the move necessary or is it something that you can delay by six months, a year or two years in order to save up that cash?” he says.

Less debt consolidation and refinancing

Debt consolidation is consistently one of the most common reasons people take out a personal loan, and that remained true in 2020. These loans roll together multiple unsecured debts, like credit card debt and other high-interest loans, and leave you with a single monthly payment toward the new loan.

Debt consolidation loans are popular because they can have lower annual percentage rates than credit cards. A personal loan is often the best way to consolidate debt if you can get a lower rate than what you’re currently paying.

But the percentage of people who said they pre-qualified for a personal loan to consolidate debt or refinance credit cards dropped in 2020. These were among the only reasons NerdWallet members chose less often, along with vacation.

Early in the pandemic, many lenders slowed lending and tightened their credit standards. At the same time, borrowers tightened their budgets.

Consumers became “remarkably financially responsible” last year in the face of economic uncertainty, Tambor says.

“People are paying down credit cards, they’re paying down debt, so you just see a little bit less debt consolidation,” he says.

Though borrowing for debt consolidation decreased last year, it was still the most popular reason NerdWallet members gave when they pre-qualified. Over half (55%) said they wanted to consolidate debt. Another roughly 7% said they wanted to refinance their credit card with a personal loan.

Home renovations remained consistent

About 7% of pre-qualified NerdWallet users chose home renovation as the reason for borrowing in 2020, which is consistent with the year before.

Despite the consistency, many consumers saw stay-at-home orders triggered by the pandemic as an opportunity to tackle projects they either didn’t have time for or didn’t think of before, Walsh says.

“For some people, it was just the fact that this was the most time they spent at home ever,” he says. “Other people just had more time on their hands because they weren’t as busy leaving the house, so it gave them the opportunity to do (renovations) that they had been meaning to do.”

Homeowners often pay for home improvement projects with cash. If you don’t have the cash to cover a project, personal loans are one of a handful of available financing options.

These loans can often be funded in under a week and are usually repaid in about two to 12 years, making them a good choice if you want to start the renovation — and repay the loan — quickly.

Other reasons for getting a personal loan

Vacation, business expenses and “other” are also options consumers can choose when they pre-qualify for a personal loan with NerdWallet. About 14% chose “other” in 2020, which is up from 10% in 2019. Vacation made up less than 1% of the reasons NerdWallet members who pre-qualified chose, and those looking to cover business costs accounted for around 2%.

Tips for getting a personal loan during a recession

Tambor says understanding your current budget and how a personal loan will change it is essential to borrowing right now.

Here are some other tips for getting an unsecured loan in a changing economy.

The reason matters. Sure, you can get a personal loan for most expenses, but some lenders offer different annual percentage rates for different loan purposes. For example, online lender LightStream lists a lower APR range for home improvement projects than for medical expenses. Others will consider the reason you give on your application when deciding your rate.

Keep your credit score up. Your credit score is an important factor, though not the only one, in determining whether you qualify for a personal loan and what rate you’ll get. The best rates go to borrowers with high credit scores and long histories of on-time payments toward things like credit cards and auto loans.

Keep your debt down. Lenders want to be sure that you can make your payments on time each month and still have money left over. If you have a high debt-to-income ratio, you might want to pay down some of that other debt before you apply.

Get your documents ready. Naturally, lenders have been taking a closer look at what you list as your income and the documentation you provide to back it up. A steady income reflected on W-2s and pay stubs will go a long way on a loan application, even as the economy improves and lenders loosen their standards.

Compare options and offers. Pre-qualifying allows you to see what personal loan rate and amount you could get and then compare it with other offers and financing options, like credit cards. Because there’s no hard credit pull, you can pre-qualify with multiple lenders at once on NerdWallet without affecting your credit score.

Methodology

The data contains all NerdWallet members who completed pre-qualification through NerdWallet and received at least one loan offer from lenders in NerdWallet’s marketplace from Jan. 1, 2019, through Dec. 31, 2020.

The data is anonymized, and all information about the offers users received is excluded. In the pre-qualification process, users are asked why they are getting a loan and must provide an answer to move forward. The data here reflects a breakdown of the reasons users gave each year, by number and percent.

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