Financially Secure People Use Personal Loans to Keep the Economy Running

Financially secure Americans are increasingly turning to unsecured personal loans, pushing total balances to a record $241 billion in the third quarter as U.S. retail sales hit nearly $705 billion in September.

This rise, as reported in TransUnion’s latest Credit Industry Insights report, is being led by prime consumers (those with a credit score of 781 or higher) amid stubborn inflation that is forcing them to ride out the surge prices.

Americans added $9 billion in unsecured loans during the third quarter, according to TransUnion data, marking the eighth straight month of growth, with superprime consumers leading the pack with year-over-year balance growth. the other 38.6 percent.

According to Silvia Manent, founder and managing partner of Manent Capital: “The increase in unsecured loans could indicate a proactive approach by these consumers to consolidate their debts and secure funds for potential investments. »

However, Charlie Wise, senior vice president of global research and consulting at TransUnion, said rising inflation post-COVID has “left overall prices significantly higher across a wide range of products and services – not just discretionary spending categories, but also everyday items.” that consumers rely on. » This, Wise added, encourages consumers to use lines of credit.

Unsecured personal loans offer unsecured financial opportunities with predictable repayment terms, attractive to consumers with strong credit histories. In recent years, these types of loans have become strategic financial tools for debt consolidation, credit refinancing, and covering expenses such as home renovations.

Current borrowing behavior contrasts with previous economic cycles. Brad McMillan, chief investment officer of Commonwealth Financial Network, said News week: “Unlike the aftermath of the 2008 financial crisis, when balances were less pronounced among borrowers, personal loan balances saw an uptick in the year following the COVID-19 lockdowns.”

With this historical data in mind, the recent uptick in borrowing by the most creditworthy individuals stands out, especially at a time when loan originations for other credit levels are generally seeing a slowdown, according to TransUnion data . The number of super prime issuances increased by almost 20% during the quarter, while issuance for lower tiers decreased slightly or remained stable.

While higher-risk borrowers are traditionally seen as less reliant on borrowing, their increased activity in the personal loan market has notable implications, alongside data from the New York Federal Reserve released Tuesday that shows U.S. households added about $78 billion in debt during the third quarter. and a retail sales report that highlighted the surprising resilience of consumer spending.

“People tend to like the predictability of installment loans like personal loans and buying now, paying later,” said Matt Shulz, chief credit analyst at Lending Tree. News week. “People also like that installment loans are limited. They like being able to borrow money when they need it, but when it’s paid off, they want to be done with it.”

“Most personal loans are taken out for debt consolidation and credit card refinancing purposes,” Manent added.

The increase in borrowing presents a dichotomy: The financially secure added $3.47 billion in personal loans during the quarter, while the U.S. consumer as a whole continues to spend discretionarily amid rising borrowing. prices and economic uncertainty.

“This is something worth monitoring in the coming months,” Liz Pagel, senior vice president of consumer lending at TransUnion, said in a statement. She added that there is a growing preference for “consumers refinancing their card debt at higher interest rates.”

Although personal loans offer flexible financial solutions, they carry inherent risks that consumers must manage. In the event of an economic downturn, “individuals with significant loan obligations could find themselves in precarious financial situations,” Manent warned.

To that end, as higher-risk borrowers add personal loans, TransUnion data indicates that the cohort’s delinquencies have increased. About 24% of super prime borrowers who took out a loan in 2021 were 60 days delinquent (DPD), and 26% of super prime borrowers who took out a loan in 2022 were 60 DPD despite their annual interest rates being by almost 6 percentage points. lower than that of the average borrower.

“If you’re a super prime borrower, your best bet in this case is a 0% balance transfer credit card,” Schulz said. “As helpful as a personal loan can be, you won’t get a 0% deal with one.”

More broadly, Pagel said delinquency rates for consumers over 60 DPDs are only slightly lower than they were a year ago, at 3.75 percent, thanks to improved performance loans from lower risk borrowers.

More than just a way to meet immediate financial needs, personal loans are increasingly used for debt consolidation, home improvement and financing major life events. “That doesn’t mean it’s the right decision,” Schulz said.