Ten years on from the credit crisis, Americans are again piling on debt in all its varieties, from credit cards to student loans to mortgages. These days, personal loans—a category turbocharged by fintech upstarts—are growing especially quickly. With an increasing number of shaky borrowers taking on this debt, the risks are growing for lenders during the next economic downturn.
The stock of personal loans outstanding has grown to about $120 billion as of March, according to TransUnion data. That compares with $71.9 billion a decade ago—worth around $90 billion adjusted for inflation—when the subprime mortgage crisis crescendoed. About 17 million Americans have this type of debt which, unlike mortgages and automobile loans, isn’t collateralized by an asset.
Upstart financial technology companies like Lending Club, Prosper, and Avant account for about a third of this lending, up from less than 1% in 2010.
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, a number of banks and credit unions avoided personal loans because they are unsecured, which often results in greater losses for lenders when the economy slows and loans go sour.
But fintechs have led a personal-loan revival. As traditional financial firms stepped away from the sector, startups found that many of these borrowers preferred their digital platforms, which can provide quick and easy credit, Laky said. Personal loans don’t have the paperwork that comes with collateral, so funds can be rapidly originated and transferred to the borrower.
In many cases, personal loans are taken out to refinance other kinds of debt, like credit card balances. Other consumers use them for, say, home improvement projects that would have previously been financed with a home equity loan.
Fintechs are aggressively pushing into this space, but banks and credit unions are also ramping up their efforts. Tech upstarts account for about $31 billion of this type of debt, compared with $22.5 billion for banks and $18.7 billion for credit unions, according to TransUnion data. The amount of personal loans outstanding originated by banks has more than doubled since 2010.
Goldman Sachs has jumped in with its Marcus online bank, which the Wall Street stalwart introduced in 2016. Goldman says Marcus has more than 1.5 million customers and has originated more than $4 billion in consumer loans since it launched.
Despite rapid growth, the size of the personal loan market is relatively modest. About 6% of American consumers have an open loan, according to TransUnion data, compared with 29% for auto loans and 60% for credit card loans. “We believe there is a lot of runway,” Laky said.
A major test will be when the economy slows down, or even contracts. As financial firms compete to lend money, they’ve been extending more credit to subprime borrowers who are at higher risk of default. Lately, analysts and finance execs have mentioned the “credit cycle” during earnings calls more than at any time since the last downturn, according to Sentieo. The most recent personal-loan vintages have the highest delinquency rates.
Though many of these newer lenders haven’t been through a recession before, Laky pointed out that they have recruited seasoned financial executives who have been through tough times before. Even so, he acknowledged that all lenders—not just fintechs—will face challenges when the downturn finally arrives.