Consumers Place Personal Loans Atop the Credit Mountain
May 17 2017 - 5:00AM
When faced with the choice of which debts to pay and which to miss,
consumers in financial distress tend to prioritize unsecured
personal loans ahead of other credit products such as auto loans,
mortgages and credit cards. These findings were released today
during TransUnion’s annual Financial Services Summit, attended by
more than 300 senior-level financial services executives from
around the globe.
The most recent study incorporates unsecured personal loans for
the first time since TransUnion began analyzing the payment
hierarchy dynamic in 2010. Beyond personal loans, this most recent
analysis is consistent with prior TransUnion studies in finding
that consumers have historically prioritized auto loans over their
mortgages and credit cards, and have done so consistently since at
least the beginning of 2004.
“It is quite surprising to us that, for most struggling
consumers, unsecured personal loan payments are prioritized over
other prominent credit products such as mortgages and auto loans,”
said Ezra Becker, senior vice president and head of research for
TransUnion’s financial services business unit. “While personal
loans have existed for a long time, recent growth in the number of
such loans led us to explore this product’s position along the
payment spectrum. The prioritization of personal loan payments
above all others is counterintuitive, but our study results are
clear. We believe the relatively short duration of these
loans—usually less than 30 months—is a key factor in the decision
process of consumers.”
Personal Loan Delinquencies* Consistently Remain Lower Than
Other Loan Types |
Delinquency* Rates for Consumers
Possessing Auto Loans, Credit Cards, Mortgage
Loans and Unsecured Personal Loans |
Year |
Personal Loan |
Auto Loan |
Mortgage |
Credit Card |
Q4 2012 |
1.10% |
|
1.86% |
|
3.49% |
|
3.11% |
|
Q4 2013 |
1.17% |
|
1.84% |
|
3.13% |
|
3.23% |
|
Q4 2014 |
1.19% |
|
1.76% |
|
2.63% |
|
3.05% |
|
Q4 2015 |
1.26% |
|
1.68% |
|
2.32% |
|
2.87% |
|
Q4 2016 |
1.49% |
|
1.75% |
|
2.44% |
|
3.65% |
|
*Delinquency rates after 12 months for consumers who possess and
are current on all four credit products at the beginning of the
respective performance measurement
period.
Recent TransUnion data show that average term lengths are much
shorter for unsecured personal loans. For loans originated in Q4
2016, unsecured personal loans had an average term of 28 months. In
this same timeframe, the length of auto loans averaged 60 months
and mortgages averaged 230 months.
“We conjecture that personal loan borrowers may feel they can
get a quick win with these loans even when they are struggling, and
there is a clear, near-term end to the obligation—a ‘light at the
end of the tunnel,’ in a sense,” said Becker. “In contrast, auto
loans and mortgages have much longer terms, and credit cards have
no set end date. Finding an opportunity to pay a debt in full can
be a powerful motivator for a struggling consumer.”
Historical Payment Patterns “Shocked” During Great
Recession
Prior to including unsecured personal loans in the payment
hierarchy analysis, TransUnion had reviewed payment patterns for
auto loans, credit cards and mortgages. Since at least 2004,
consumers with an auto loan, credit card and mortgage have
prioritized their auto payments. Mortgages have traditionally been
the second payment made, followed by credit cards.
“Auto loans have traditionally been the prioritized payment
because most people need a car to get to and from work, run errands
or bring their kids to school or other activities,” said Nidhi
Verma, senior director of research and consulting in TransUnion’s
financial services business unit. “The far majority of the
population does not live in markets such as downtown New York or
Chicago, which have strong public transportation infrastructures.
Viable alternatives to owning a car are scarce, hence the need to
keep up with auto loan payments.”
This dynamic changed dramatically during the Great Recession as
the housing crisis devalued millions of homes. As a result, the
payment hierarchy flipped in Q3 2008, with consumers paying their
credit cards prior to their mortgages. “As housing values began
crashing in 2007 and 2008, many homeowners found themselves
‘underwater’ on their mortgages, meaning they owed more on their
mortgages than the value of their homes. With unemployment sharply
rising, a lot of these borrowers began to emphasize their credit
card payments, protecting their liquidity as a vehicle to pay their
bills or simply to put food on the table,” added Verma.
This trend lasted well into the housing market recovery,
reverting to the historical norm in Q1 2014. “The payment hierarchy
is complex—the decision process for struggling borrowers is a
difficult one. We confirmed through our study that both the
strength of the labor market and housing values continue to be
critical drivers of that decision process. In addition, the timing
of consequences, availability of alternatives and social stigma all
play a role. The housing crisis was a shock to the system that we
fervently hope was a once-in-a-lifetime occasion. Barring another
such trauma to the consumer credit market, we believe financially
constrained borrowers will tend to pay their personal loans, auto
loans, mortgages and credit cards in that order,” concluded
Becker.
For more information about the study, please
click here.
About the StudyTransUnion observed yearly
credit performance for consumers who possessed at least one active
auto loan, credit card, mortgage and unsecured personal loan, and
were current at time of study selection. Such consumer cohorts were
identified in every quarter between 2009 and 2015, with performance
evaluated after 12 months. As an example, delinquency rates for the
Q4 2015 cohort were evaluated as of the end of 2016. On average,
TransUnion studied approximately two million credit-active
consumers with this specific wallet profile in each quarterly
cohort.
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TransUnion
E-mail dblumberg@transunion.com
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