February 26, 2024

State of Consumer Lending

Personal Loan Growth Returns

By

Andrew Naoum

Credit Marketing Challenges

The credit market landscape is facing a surge in challenges due to the rapid rise of inflation and higher interest rates– impacting businesses and consumers alike. In response, the Federal Reserve has tightened policies to combat inflation: increasing the cost of borrowing and constricting issuer cash flow. This means that customers need help accessing credit at competitive rates.

To make matters more challenging for lenders, consumer preferences are shifting away from traditional forms of borrowing, gravitating to alternative forms that offer more flexible repayment options, lower interest rates, or non-traditional financial products. With more competition in the market, lenders must differentiate themselves by providing alternative products or services to remain competitive - this requires them to invest resources in developing innovative strategies tailored towards consumer needs, while staying within regulatory constraints.

The personal lending landscape

Personal lending has risen in recent years, and 2023 is no exception. New data shows that, as of the second quarter of 2023, Americans owe $232 billion in personal loan debt, a 3.1% quarter-over-quarter jump and a 21.5% increase from the previous year. The number of Americans with a personal loan has also grown 8.1% year-over-year to 22.7 million people.

Personal loans currently make up 1.4% of outstanding consumer debt and 4.9% of non-housing consumer debt—a much lower proportion than credit card debt, which accounts for 6.0%. This suggests that despite its rapid growth, there is still plenty of room for personal lending to expand. With bank deposits down 4.8% since the start of the year, more individuals will likely turn to personal loans of to pay bills and reduce their other debt obligations.

Unfortunately, there are signs that not all borrowers are managing their loans responsibly. The delinquency rate (60 days or more past due) for personal loans increased from 3.37% in the previous year to 3.62%, indicating an uptick in borrowers struggling with repayment obligations on their loans. This could present challenges for lenders looking to effectively manage credit risk while offering competitive products and services that meet borrower needs going forward into 2023 and beyond.

Personal loan growth returns after dropping early in pandemic

Lenders have adjusted their risk assessments and underwriting criteria as the personal loan market recovers from the pandemic. With more Americans taking out personal loans, lenders are placing a greater emphasis on borrowers' creditworthiness and financial health. Given the current macroeconomic environment, this shift has led to a broader range of consumers seeking loans as well as encouraging lenders to place more importance on factors such as income verification and debt-to-income ratios.

At the same time, lenders increasingly use technology to analyze consumer data, such as spending patterns and payment history. With student loan payments resuming, 96% of student loan borrowers are looking for ways to change their spending habits. This allows them to better understand borrowers' needs, tailor products accordingly, and offer them products at the right time in their financial journey. For instance, some lenders now offer their downturned customers alternative offers, or refinancing options based on their unique financial situation. These changes can help ensure that customers aren't saddled with unsustainable debt burdens, overly restrictive repayment terms, or lack of accessibility given their economic situation.

Looking Ahead

Various factors will shape the future of consumer lending, specifically how lenders meet customers where they are in their financial journey. As the industry evolves, lenders must keep pace with technological advancements and develop personalized services that meet their customers' needs.

To remain competitive, lenders will need to focus on developing innovative digital platforms that offer secure and frictionless user experiences. Using new channels outside traditional methods of search and social media can help distinguish a lender’s offering in a crowded ecosystem. It is also essential for lenders to consider their risk management strategies as they expand their operations into new markets or segments. This includes diversifying their portfolios across different loan sizes and issuing risk-based pricing tailored for each customer segment.

Finally, lenders must strive towards creating an inclusive consumer lending ecosystem where borrowers have equitable access to capital regardless of their financial background or credit history. By implementing innovative technologies such as machine learning and AI-driven decision-making tools and incorporating third party offerings into their ecosystem, lenders can create an inclusive environment that nurtures growth in the industry while ensuring they address the needs of all of their customers.

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