Personal Loans Reach Record High in America

Americans are once again piling on debt in all forms, from credit cards to student loans to mortgages. However, personal loans have jumped to the rescue—growing increasingly over the past few years.

The risks are continually rising for lenders during the next economic downturn, as an increasing number of unstable borrowers hope to resolve their debts. However, personal loans surged to a record high this year and are the fastest-growing U.S. consumer-lending category, according to data from credit bureau TransUnion.

The stock of outstanding personal loans grew to about $120 million in March and that compares with $71.9 billion a decade ago—now worth around $90 billion if adjusted for inflation—during when the subprime mortgage crisis rose. Unlike mortgages and automobile loans, about 17 million American have this type of debt which isn’t collateralized by an asset.

“Fintech companies originated 36 percent of total personal loans in 2017 compared with less than 1 percent in 2010,” said Chicago-based TransUnion.

Until recently, personal loans were mainly used by borrowers with poor credit, who may not have had access to credit cards or home equity loans, according to Jason Laky, TransUnion’s consumer-lending business lead. During the most recent recession, quite a number if banks and credit unions avoided taking personal loan because they termed it “unsecured”—this ultimately led to greater loss for lenders when the economy dips and loans go sour.

“Is it a perfect loan? No,” said Turner in an interview, who needed a quick loan and didn’t want to put up a car or house as a collateral. “We didn’t expect some low-interest personal loan with no collateral.” Fintech web-based firms like LendingClub, Prosper Marketplace Inc. and closely held Social Finance Inc. are aggressively pushing the expansion of personal loans. In a filling, LendingClub said that personal-loan originations in the first quarter increased by 20 percent from a year earlier to $2.1 billion.

“A lot of credit goes to the fintech lenders for reinvigorating a loan category that’s been around forever,” said Jason Laky, TransUnion’s consumer-lending business lead.

“If you think about ‘It’s a Wonderful Life,’ George Bailey and his bank offered personal loans to the consumers. It’s a core banking product that’s been around since the beginning of banking.”

Credit unions and banks are equally increasing their effort to get a piece of the market through online platforms including SunTrust Banks Inc.’s LightStream and Goldman Sachs Group Inc.’s Marcus.

“As a result of movements in technology, the opportunity in the consumer space has moved to us,” said Goldman Sachs Chief Executive Officer, Lloyd Blankfein last month at the Economic Club of New York.

However, this rapid growth has been greeted with concerns by some analysts about the potential for increased losses in consumer credit as interest rates soars. In the U.S., total household debt reached a new peak in the first quarter, according to the Federal Reserve Bank of New York. Head of consumer banking business in Bank of America Corp., Dean Athanasia, said in June that his firm is “keeping an eye on consumers ‘layering’ debt by tapping multiple lenders.”

According to Wells Fargo & Co. analyst, Don Fandetti, consumers have resorted to personal loans to consolidate debt and make one-time purchases amid a “reluctance to tap home equity after the credit crisis.” For some fintech companies and companies like Marcus who are just breaking into the scene, it’s easier to offer personal loans than go head-head with credit-card lenders, who already have an edge in brand awareness, he said.

In the first quarter, personal loans accounted for just 1 percent of the total outstanding consumer balance of $12.9 trillion, according to TransUnion. The giant share of consumer debt is from mortgages, at almost $9 trillion outstanding, followed by student and auto loans.

“The personal-loan segment is poised to grow further as lenders pull back from areas such as credit cards and auto,” said Fandetti.

Despite this, not everyone seems keen on it as Discover Financial Service is among lenders that have scaled back on personal loans. CEO David Nelms said at a conference in June that some fintechs “maybe getting a little carried away on pricing and credit.”

But according to TransUnion’s Laky, the continual influx of players shouldn’t pose a threat to businesses.

“It’s never unhealthy for the consumer to have more choices,” he said.

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