BNPL is not the only borrowing tool revived from the annals of banking. This time, it is Installment loans. Just as Buy Now, Pay Later recast the legacy models of GE Credit and Household Finance, installment loans are making a reprise. The installment loan was the only game in town until credit cards became the preferred lending and borrowing product in the 1980s.
The WSJ reports.
“Lenders want to get back to building their loan books that were destroyed during Covid,” At Citigroup Inc., U.S. balances of personal and other unsecured installment loans rose 75% in the first quarter of 2022 from the same period a year earlier.
Wells Fargo & Co. extended $798 million in new personal loans during the fourth quarter of 2021, up from $294 million a year earlier and $708 million in 2019. SoFi originated a record $1.6 billion of personal loans in the fourth quarter of 2021, up from $614 million and $801 million, respectively.
Installment loans tend to be cheaper for consumers, but they are structured differently than revolving credit. According to the Federal Reserve, the average personal loan rate for a 24-month installment loan in February 2022 was 9.41%, versus 16.17% for a credit card
Credit cards require lenders to be ready for the consumer to use any or all their credit line, though people tend to use just 25% of their credit line. That operational cost, along with point-of-sale fraud risk, and slightly higher credit loss rates push up the cost of revolving credit.
With a credit card, the consumer can balance their budget. They might need access to credit for one month, then pay down quickly. Installment loans fit into a budget nicely, but they tend to be for purposeful events, such as consolidating credit card debt, paying for a vacation, or a family event.
In a recent Mercator report, we noted that fintechs displaced financial institutions as the top lending group for installment loans. Like BNPL, the fintech revival repositions a legacy product as “new and improved.”
It is a suitable time for traditional lenders to reconsider installment lending. That is what top banks are doing, and as interest rates rise, there should be many lending opportunities to rebuild lending books.
If the industry is looking for revivals, my credit policy hat prefers depository lending, something that Fiserv recreated. It is like a passbook loan from days gone by. Borrow money and secure it with your savings account. This is just as good as lending yourself money or using a 401k loan to fund your next car. Little or no credit risk, and the ultimate in low-cost lending.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group