Stimulus, excess savings temper demand for personal loans

Higher savings rates and changing spending patterns drove down unsecured personal lending in 2020, even as other consumer lending in other categories rose.

Total balances of unsecured personal loans 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 decreased 9% to 21.2 million nationwide over the same period. The figures exclude point-of-sale loans.

Unsecured personal lending, which was surging until the pandemic, took a hit at the end of 2020 as consumers continued to stay home, save money and pay down credit card balances. Stimulus payments and assistance programs helped keep delinquency rates low, although it’s hard to know now how low they will stay. Experts say it’s unlikely that demand for the product will bounce back until daily life returns to something closer to normal.

Lenders pulled back from unsecured lending “pretty dramatically” in the early days of the pandemic, said Liz Pagel, consumer lending business leader at TransUnion. While some, especially online lenders, are returning to that market, the demand by consumers hasn’t recovered.

“Debt consolidation is one of the primary use cases in unsecured personal loans and with low credit card balances across the board, that’s just not as compelling,” Pagel said. “We saw consumers paying down their credit card balances with stimulus checks and just with lower spending overall. That need just isn’t as front and center for consumers.”

The credit card data in TransUnion’s report supports that analysis. The number of credit card accounts stood at 452.8 million, slightly down from the fourth quarter of 2019, and third-quarter originations (the latest available) fell more than a third to 12.3 million from a year earlier. Average credit card debt per borrower also declined to $5,111 in the fourth quarter from $5,835 in the fourth quarter of 2019, and new account lines averaged $3,722 compared with $5,214.

By contrast, mortgage lending rose as consumers bought and refinanced houses at low rates, and auto lending recovered as COVID-19-related lockdowns eased.

Financially stressed consumers are likely not looking for an unsecured personal loan. Those who kept their jobs but changed their spending habits are better able to save for large purchases and pay down credit card debt, said Teresa Blake, partner and lending transformation solution leader at KPMG.

“If I’ve been able to save because I haven’t been able to travel, then I’m not spending the same kind of money I did a year ago,” she said.

Delinquency rates on unsecured personal loans remained low at 2.46%, compared with 3.46% a year earlier. It’s hard to tell whether delinquencies will stay that low, or for how long, though. Additional stimulus checks, an extension of federal unemployment benefits and continued forbearance programs by lenders could help hold down delinquencies.

“Another stimulus check will do two things,” Pagel said. “One, we’ll see consumers be able to make their payments. That’ll be great for delinquencies, but it will also hurt demand for unsecured personal loans.”

A recovery in unsecured personal lending depends on the economic recovery and the path of the pandemic more generally. Until consumers begin spending more on credit cards, weddings and vacations, demand for those loans is likely to be weak, Pagel said.

“Spending has to come back,” she said. “Once people really come out of lockdown, I don’t know if we’ll see a huge run to big vacations, but I think that will drive more demand for unsecured personal loans.”

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