Personal Loan Growth Hints At Strategy Vs Credit Card Debt

Call it a case of six of one, half dozen of the other.

Call it a case of financial alchemy.

Call it maybe — just maybe — a prudent financial management strategy, with the thesis that not all debt is created equal.

News comes this week, as reported by The Seattle Times, that U.S. consumers are taking out personal loans at a pace that has not been seen since before the Great Recession. The money is being used to pay for one-off expenses such as vacations — and also to pay down credit card debt.

In terms of headline stats, the growth rate, per data from Equifax, tops 10 percent. The data from Experian and TransUnion also show growth rates in the double digits.

The question posed in the report is why Americans would seek cash amid strong economic times, where employment is strong, and wages are still growing at an annualized pace of low single-digit percentages.

The personal loan balance, on average, stands at a bit more than $16,200, as estimated by Experian.

In another data point, personal loan balances that are more than $30,000 are up 15 percent through the past five years. The roster of Americans who have such loans, where 40 percent are sourced from FinTechs and other tech-driven firms (complete with online conduits for applications), stands at 20 million individuals.

There are of course at least some warning signs in the offing. Aggregate debt levels are at recent highs. Chief among those debt types is credit card debt, which now stands at nearly $900 million. The personal loan market is now $115 billion, as reported by Equifax, and as estimated in October. Painting all debt with a broad brush may be a bit too broad-brushed.

At first glance, simply adding a personal loan to a debt profile that may include mortgages, autos, credit cards and other obligations may be a problem down the road. It may indeed be the case that personal loans may prop up consumer spending (particularly during the holiday season).

We note that recent interest rate cuts have made the cost of carrying debt a bit cheaper — if borrowers refinance into lower rates, or if they use a personal loan to pay down more expensive debt. The ripple effect of the lower interest rates and the availability of personal loans may, ultimately, be a boon over the longer term.

“The bulk of the industry is really in your mid-600s to high 600s. That’s kind of a sweet spot for FinTech lenders,” said Michael Funderburk, general manager of personal loans at LendingTree, as quoted by the Times. “We see a lot of consumers that have been doing perfectly fine in their financial life. They are gainfully employed. They have a family. They have a mortgage, but something happened. They lost a job. Or a medical emergency … the net result of that is they missed a bill or ended up with a little bit more credit card debt than they wanted.” Separately, and anecdotally, at least some FinTechs have said they see growing embrace of personal loans that are used to pay bills (before being deposited in users’ bank accounts).

A dollar of credit card debt, at an average interest rate of 17.2 percent, is far more expensive than personal loans, where the interest rates can be in the mid single digits. The strategy may pay dividends — and may set consumers to remain a healthy (still) engine of economic growth.