Impetus, excess savings dampen demand for personal loans

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Higher savings rates and changing spending patterns resulted in a decline in unsecured personal loans in 2020, while other consumer loans increased in other categories.

The total unsecured personal loan balance fell 8% year over year to $ 148 billion in the fourth quarter of 2020, TransUnion said in a consumer credit report released Thursday. The number of unsecured personal loans also fell nationwide by 9% to 21.2 million in the same period. The numbers do not include point of sale loans.

Unsecured personal loans, what stormed until the pandemic, suffered a blow in late 2020 as consumers continued to stay home, save money, and withdraw credit card balances. Stimulus payments and aid programs helped keep default rates low, although it is difficult to predict how low they will remain at the moment. Experts say that demand for the product is unlikely to recover until everyday life returns to normal.

Lenders pulled out of unsecured lending “pretty dramatically” in the early days of the pandemic, said Liz Pagel, director of consumer lending at TransUnion. While some, especially online lenders, are returning to this market, consumer demand has not recovered.

“Debt consolidation is a major use case with unsecured personal loans and with overall low credit card balances it’s just not that convincing,” said Pagel. “We saw how consumers paid off their credit card balance with stimulus checks and only with a lower overall expenditure. This need is simply not in the foreground for consumers. “

The credit card details in the TransUnion report support this analysis. The number of credit card accounts was 452.8 million, slightly below the fourth quarter of 2019, and origination in the third quarter (the last available) fell by more than a third year-on-year to 12.3 million. The average credit card debt per borrower also decreased from $ 5,835 in the fourth quarter of 2019 to $ 5,111 in the fourth quarter, and new account lines averaged $ 3,722 versus $ 5,214.

In contrast, mortgage lending rose as consumers bought and refinanced homes at low interest rates, and car lending rebounded as the COVID-19-related lockdowns subsided.

Financially stressed consumers are unlikely to be looking for an unsecured personal loan. Those who have kept their jobs but have changed their spending habits are better off saving for big purchases and paying off credit card debts, said Teresa Blake, partner and head of credit transformation solutions at KPMG.

“If I could save because I couldn’t travel, I won’t be spending the same money as I was a year ago,” she said.

Unsecured personal loan default rates remained low at 2.46%, compared to 3.46% a year earlier. However, it is difficult to say whether and how long the defaults will remain so low. Additional economic controls, an increase in federal unemployment benefits, and continued deferral programs by lenders could help curb payment defaults.

“Another stimulus check will do two things,” said Pagel. “For one thing, we’ll see how consumers can make their payments. This is great for default, but it will also hurt the demand for unsecured personal loans. “

A recovery in unsecured personal credit depends on the economic recovery and the course of the pandemic in general. Until consumers start spending more on credit cards, weddings, and vacations, demand for these loans will likely be weak, Pagel said.

“The expenses have to come back,” she said. “Once people really get out of the lockdown, I don’t know if we’ll see a big rush for big vacations, but I think that will increase the demand for unsecured personal loans.”


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