Consumers Getting Really Serious About Deleveraging

by Ken Paterson 0

Do you think consumers are seriousabout paying down their credit card debt?If you are not convincedby the still-plummeting Federal Reserve G19 statistics forrevolving credit, then look to a much smaller universe:peer-to-peer lenders.

Our recent report, Trendsin Small-Dollar Credit: A Look at the Market and Future of SmallLoans(December 2010), looks at a number ofalternative consumer credit providers including the peer-to-peerlenders Prosper and Lending Club.You might envision theseinnovative providers as enabling credit for entrepreneurs, whichthey do.But it is certainly noteworthy to find that Prospercategorizes 49% of their loans as for debt consolidation (includingcredit cards), and Lending Club notes 63%of their loans are usedfor credit card consolidation purposes.These are (rather obviously)the main loan categories served by these providers, and businessuses are a minority.This usage speaks to several importantfactors:

  • The need and desire ofconsumers to pay off credit card debt, and at probably advantageouscredit terms
  • The lengths to which somesavvy consumers will go (a new application at a new provider) toget better terms and reduce credit card balances
  • The fact that individualinvestors (i.e. the peer lenders) are willing to lend to consumerswishing to borrow for these purposes

Make no mistake, these aresmall lenders compared with the credit card industry, makinghundreds of millions in loans compared with hundreds of billionsoutstanding on credit cards.And it is highly unlikely that theirbusiness models will scale up to serve the mass credit market thatcredit cards already serve.But we need to recognize what thesecredit card consolidation loans represent: consumers very seriousabout getting out of card-based debt, and investors who feel theconsumers are good enough risks to help out.

Just one more worrisome omenfor the credit card industry…