Are personal loans the greatest new thing, or simply a way to shift credit card debt? This article in the Washington Post suggests the latter:
- Personal loans are up more than 10 percent from a year ago, according to data from Equifax, a rapid pace of growth that has not been seen on a sustained basis since shortly before the Great Recession.
- All three of the major consumer credit agencies — Equifax, Experian and TransUnion — report double-digit growth in this market in recent months.
- Experts are surprised to see millions of Americans taking on so much personal loan debt at a time when the economy looks healthy and paychecks are growing for many workers, raising questions about why so many people are seeking an extra infusion of cash.
- “Definitely yellow flares should be starting to go off,” said Mark Zandi, chief economist at Moody’s Analytics, which monitors consumer credit. “There’s an old adage in banking: If it’s growing like a weed, it probably is a weed.”
The big question is this: Why are loans growing at a faster pace than credit cards? Sure, they are on a smaller base, but are we lending too much?
- The average personal loan balance is $16,259, according to Experian, a level that is similar to credit card debt.
- Personal loan balances over $30,000 have jumped 15 percent in the past five years, Experian found. The trend comes as U.S. consumer debt has reached record levels, according to the Federal Reserve Bank of New York.
- The rapid growth in personal loans in recent years has coincided with a FinTech explosion of apps and websites that have made obtaining these loans an easy process that can be done from the comfort of one’s living room. FinTech companies account for nearly 40 percent of personal loan balances, up from just 5 percent in 2013, according to TransUnion.
How long will this economic recovery last? No one knows but each day we are one day closer to the bust.
- Total outstanding personal loan debt stood at $115 billion in October, according to Equifax, much smaller than the auto loan market ($1.3 trillion) or credit cards ($880 billion).
- Economists who watch this debt closely say personal loans are still too small to rock the entire financial system in the way $10 trillion worth of home loans did during the 2008-09 financial crisis.
The focus on sub-prime is a concern.
- The most common recipient of a personal loan is someone with a “near prime” credit score of 620 to 699, a level that indicates they have had some difficulty making payments in the past.
- “The bulk of the industry is really in your mid-600s to high 600s. That’s kind of a sweet spot for FinTech lenders,” said Michael Funderburk, general manager of personal loans at LendingTree.
- But as the number of Americans with one of these loans grows, so does the potential for pain if the unemployment rate ticks up and more people find themselves strapped for short-term cash.
The problem with unsecured, easy credit is that sooner or later, you will have to pay the piper!
Overview by Brian Riley, Director, Credit Advisory Service at Mecator Advisory Group
