Installment loans are the hit of 2019, and this Forbes article wonders if growth has been too rapid, citing data from a recent Experian study.
- Student loan debt levels have become a $1.5 trillion dollar crisis, and we borrow way too much to finance new cars that depreciate at a rapid pace. In fact, the average new auto loan worked out to a shocking $32,187 during the first quarter of 2019, and nobody seems to care.
- Not surprisingly, the usage of personal loans is also on the rise, as evidenced by a 2019 survey from credit reporting agency Experian. Personal loans are currently the fastest growing type of consumer debt, they note, showing an 11.9% increase from the fourth quarter of 2017 to the fourth quarter of 2018.
Credit card debt once dominated the American household budget. Then came student loans, and easy auto money. Today, both those loan types exceed credit card debt in the U.S.
- The average personal loan balance is shockingly high too — currently $15,143 with an average monthly payment of $353. The average APR on these loans is at around 9.37% according to Experian data, which isn’t the worst rate you can get but not that great either.
- In the final quarter of 2018, 6.1 million personal loans were originated, and 34.3 million consumers had a personal loan. In total, these consumers owe approximately $291 billion dollars.
We’ve heard this before, perhaps in mid-2006 or so?
- Experian has a few insights into why personal loans are on the rise, and their suggestions make sense.
- For one, Americans “are feeling confident about a steady economy amid historically low unemployment rates,” they note. Also, personal loans have gone mainstream thanks to a surge in online lenders who have been heavily marketing their products as a lower cost alternative to credit cards.
Consumer debt is growing. Are we losing sight on the “Ability to Repay?”
- “Several startups have contributed to the growth and now account for more than 40% of all new personal loan originations, according to Experian data,” they note.
- The rise of personal loans may also be attributed to the fact that many online lenders have been smartly marketing them as tools to escape the high interest rates credit cards charge. After all, the average credit card interest rate is currently over 17%, which is a little less than half of the average APR for personal loans. Personal loans also come with fixed interest rates and a fixed monthly payment that will never change, which makes them a much more constant, predictable option for consumers who want to create a foolproof plan to pay off debt over time.
The industry and consumers face a challenge. If consumers use installment loans to consolidate debt, then consumers need to stop using their cards. If not, household debt will implode, with few able to service their responsibilities.
Similar to balance transfer offers on credit cards. If consumers are given the cash, rather than forced to pay out a particular debt, the cash has a way of wandering outside the budget.
In short, installment loans may add some value to consumers on particular events, but if borrowers (and lenders) fail to put guardrails around usage, this stands to be a mess for all parties involved.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
