‘Fintechs’ and Personal Loans Drive Latest 4Q Borrowing Trends

Consumer using a credit card

U.S. consumers were borrowing a record $13.4 trillion from credit unions, banks, finance companies, and fintech lenders as of December 2018, driven heavily by auto lending, student loans, and mortgages for new homes.

However, many lenders are shifting their target from high-risk borrowers (subprime and near prime) to lower-risk individuals who have higher credit scores—a noticeable change when comparing 2018 to the past few years before that, according to TransUnion’s “4Q Consumer Credit Trends” webinar last week.

This transition is expected to continue in 2019. Senior Manager of Financial Services Research and Consulting Kristen Bataillon said this year’s consumer credit forecast is favorable given the “macro-economic picture” of a tight job market, moderate inflation for goods and services, and relatively healthy household confidence even during the financial market and economy’s most recent jitters.

“The highest growth over the past year was in unsecured personal lending,” Bataillon said. “Credit is still buoyed by a strong economy, and consumer sentiment is up and is driving stronger spending. Also, this increase in debt is being spread across a larger consumer base.”

The following year-over-year U.S. trends (as of Dec. 31, 2018) were discussed (view the slide presentation here):

  • PERSONAL LOANS: A record 19.1 million consumers had an “unsecured” personal loan—a 91 percent increase from 10 million in 2011. Growth was being driven by subprime and near-prime borrowers from 2010 – 2017, but today growth is being spread into prime and above-prime consumers as well (although the highest penetration remains in credit-score tiers of 600 – 660 and 681 – 720). “The usability of this product continues attracting borrowers,” Bataillon said. Much larger dollar amounts are increasingly being loaned out as most lenders on this front balance their exposure to all borrower-risk groups. Fintech financiers are issuing the highest loan amounts for prime-and-above consumers (60 percent of total unsecured/personal balances), followed by banks. Delinquencies have risen “but are not out of control.” 

    The total unsecured personal-loan balance of all lenders has more than doubled from 2013 – 2018, hitting $75 billion (with fintechs holding the largest share). “However, we are seeing huge competition from credit unions and banks,” she added. “Credit unions and banks are looking to innovate and continue being competitive in this space.” Meanwhile, fintechs’ recent focus on lower-risk borrowers shows a shift from the high-risk individuals they were focusing on just a few years ago. “I’ve heard some concerns that fintechs haven’t been through an economic downturn with these types of loans,” she said. “But quite honestly their exposure appears to be well managed so far.”

  • CREDIT CARDS: Credit card lending and originations are mostly being driven by “above prime” borrowers, although a smaller “subprime” component is also contributing to this growth. Also, delinquency rates over the past couple of years have remained steady and at a healthy level, giving “no real signs of concern.” Credit card lending is increasingly spread across many more borrowers compared to a few years ago. “Emerging loan issuers” in credit cards have been entering the “non-prime” space and are growing their market share. Much of the new credit card growth is increasingly managed by lenders having smaller credit lines.

    Credit card originations should “hold steady” in 2019. “We do foresee delinquencies rising slightly in 2019, but we expect it to be well below recessionary levels,” Bataillon said.

  • MORTGAGES: Mortgage lending is a continuing story of declining originations—a trend beginning two years ago when home-loan interest rates started rising. The main reason is refinancing volume, which has continued falling for eight quarters. There’s also been a significant decline in the average mortgage origination balance despite rising home prices, most likely due to: 1) large refinancings continuing their descent; 2) larger buyer down payments on mortgages (because of rising interest rates); and 3) mortgage originations slowing the fastest in the most expensive housing markets within the top-20 metropolitan regions.

    Also, “there aren’t as many mortgage holders out there today compared to 2008,” Bataillon said. “This is partly due to the average balances, and who is holding these mortgages (prime and above-prime versus many lower-tier borrowers from 2002 – 2008). This is where your mortgage growth is coming from these days, due to lenders’ conservative allocation.” The mortgage market continues to experience heavy competition because the greater share of lenders aren’t targeting higher-risk consumers like they did from 2002 – 2008.

  • HOME EQUITY LOANS: Home equity lending is barely growing. It continues at a very slow pace compared to the skyrocketing level of equity homeowners are experiencing. “When we look at cash-out refis, HELOCs, and second mortgages, there is very little movement,” Bataillon said. “Consumers aren’t deciding to fully take advantage of these products.” What’s interesting is: the average balance on total U.S. “revolving” loans/credit per consumer is declining, but that’s only because home equity lines of credit (which are just one type of “revolving” loan category) have continued their multi-year decline since the Great Recession ended in 2009. A much smaller share of home owners are taking out HELOCs today in contrast to the 1990s and early 2000s—and it doesn’t seem to be changing.

  • AUTO LOANS: Auto loan growth came in “a bit slower” than the year-ago period, but is still positive. From 2015 – 2017, growth was driven by subprime borrowers—but not today. In fact, third-quarter 2018 auto loan originations were recorded as “the most conservative auto origination period we’ve seen since 2010,” Bataillon said. “Credit unions continue to originate a lot of volume over the past few years while banks and finance companies have continued pulling back a little. Meanwhile, independent financiers are returning, but not in the same manner as before.”

    Because the credit union industry slowly continues taking a larger share of the auto loan marketplace quarter by quarter over several years, it’s impacting the aggregate distribution of total credit risk that TransUnion analyzes. Lender auto delinquencies in the subprime category are a little higher than other credit/loan categories, but they are not out of control (as total delinquency is mostly flat). Total balances grew to $1.23 trillion and are on track to hitting $1.3 trillion by late 2019, as growth is predicted to shift even more from sedans to small, medium and large SUVs (a continuing trend).

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