The unsecured personal loan market is at an all-time high, in large part due to the FinTech industry providing consumers with convenient and readily available services.
In fact, TransUnion The data show that the personal loan market grew 18% from 2017 to 2018, with balances reaching a staggering $ 138 billion.
Will the rise in personal loans affect the credit card industry? Find out what the experts are predicting now.
See linked: The best low interest credit cards
About personal loans
Unsecured personal loans do not require collateral.
And they’re easier to get than ever before, as fintech companies like Avant, GreenSky, SoFi, and Lending Club provide borrowers with digital or mobile options that don’t just rely on FICO scores to determine creditworthiness.
But in 2018, these types of loans generally went to the level of subprime borrowers – those with credit scores ranging from 550 to 620 – who were the fastest growing in the market with 4.3% year-on-year. other, according to TransUnion.
And that group is made up of consumers who, if the economy slows, are most likely to experience financial stress.
But a May 2019 study of TransUnion found that sometimes “lenders and consumers can benefit when additional loans are made to customers during tough times.”
This may sound contrary to what lending is, but the study found that these borrowers can often use that extra cash to get through a short-term financial crisis.
See linked: 8 ways to get friends to pay off a personal loan
Personal loan purchases vs. credit card purchases
Jaquetta Turner, site owner Youth and Finance, do not think at all that the boom in the personal loan market will affect the credit card industry.
“Although the personal loan market is at an all time high, I don’t think it will impact the credit card industry,” Turner said. “Most people who take out personal loans use the funds for things you can’t usually make with credit cards, like cars, real estate, rent payments, or debt consolidation. “
Taylor Kovar, CEO of Capital of Kovar, do not think that the increase in personal loans will significantly affect the use of credit cards by consumers, but he did notice some changes in consumer spending.
Large shopping expenses are moving away from credit cards and towards those fintech-enabled personal loans, he said.
“I have met a number of people who have chosen to take out a personal loan for small home purchases or to cover major medical expenses instead of charging those expenses to a credit card,” Kovar said.
Erik Skjodt, co-founder and CEO of the personal finance app Medina, agree with Kovar.
More and more consumers are seeing the benefit of getting a personal loan for large one-time purchases, as they can often get a lower interest rate than on a credit card, Skjodt said.
And access to personal loans has grown mainly due to the ability of fintech to use alternative data and credit metrics to better assess risk, he added.
“The fastest growing personal loan segment is coming from consumers who would be considered subprime by traditional FICO scores, and all of this seems to be positive for consumers as it has increased access to credit without seeing (again ) an increase in defaults, ”noted Skjodt.
Enter Apple Card
The Apple Card could change the credit card market because of the way it seamlessly weaves multiple mobile financial services into one easy-to-use app, said Greg Mahnken, credit industry analyst at Credit Card Insider.
“Apple is known for changing the course of the various industries in which it is pioneering innovation, so this is definitely something to watch out for,” Mahnken said.
And because personal loans are now effortlessly accessible, it’s possible that other credit cards will follow in the footsteps of the Apple Card by delivering next-level technologies that demand the limelight and offer more appeal than an easy loan to obtain, he added.
For example, the Apple Card comes with a lot of features that standalone apps like Mint can be used for, but simplifies things by combining it in the Wallet app.
The expense breakdown categorizes everything you buy by color and displays percentages in your expense summaries, making it easier than ever to see how you’re spending your money without needing to download a separate app.
“Other areas in which the credit card industry can evolve further – due to both competition spurred by easy access to loans and the pioneering technology of the Apple card – are simplicity and l ‘quick access to credit,’ Mahnken said.
Not all banks and issuers allow borrowers to use credit immediately, but the Apple Card gives you more immediate access to your card once you’re approved.
Other mobile apps offering similar integration involve more steps to actually use the credit, such as receiving the physical card in the mail and having to activate it on the app and at an ATM before you can make purchases. .
“Even rewards earned using the Apple Card are made available to cardholders on the same day with their daily cash back feature, which could also affect the credit card rewards landscape,” Mahnken said.
Interest rates are taken into account
Jordan Bishop – site founder Oyster of yesteryear – believes that the strong personal loan market will have a huge impact on the credit card industry.
But only for some card users.
Many of us like to use credit cards because they are a convenient way to transact and give us generous rewards on our purchases, Bishop said.
But there is a smaller subset of the market that uses credit cards as a personal loan: They buy something today and wait months or years to pay it off, he added.
“Since most credit cards charge annual interest rates of 17-30%, I would expect these consumers to turn to fintech loan providers, who can offer them loans at rates of. much lower interest, ”Bishop said.
And Todd Christensen, Education Manager at Money Fit by DRS – a nonprofit debt relief agency – agrees.
The advantage of personal loans over credit cards for the consumer is a fixed monthly payment with a fixed debt end date, Christensen pointed out.
“From a consumer behavior perspective, borrowers find it easier to make monthly payments and repay debt if there is a fixed monthly debt amount and a fixed repayment date,” Christensen said.
But Christensen is not a fan of financing consumer purchases.
“In my book, potentially beneficial loans are always limited to mortgages, reasonable government guaranteed student loans, and possibly a business loan,” he said.
See linked: Personal loans are spreading
Rising defaults could tighten spread between personal loans and credit cards
James Garvey, Site CEO Auto-lender, said that before personal loans, refinancing credit card debt usually involved finding a new credit card and then transferring the existing debt to the new card.
“For the past decade, consumers have used personal loans as an escape valve to refinance credit card debt,” Garvey said.
He believes that as payment defaults increase in the installment loan and credit card industries, the spreads between personal loans and credit cards will inevitably narrow.
In other words, consumers today benefit from the wide availability of cheap installment loans.
“However, increase in arrears installment loan and credit card markets will force lenders to recalibrate their models and increase interest rates for both products, ”Garvey said.
Crunch the numbers
There are pros and cons to using both personal loans and credit cards for large purchases.
The most important thing for consumers to do before deciding how to buy an expensive item is to calculate the numbers.
Take a look at the overall cost – and convenience – of using a personal loan instead of a credit card and choose the one that’s best for your situation.