Recent TransUnion® figures show that between 1Q13 and 1Q16, originations of unsecured personal loans grew at a 20% compound annual growth rate (CAGR), while average debt balances rose 8% to $7,555.A   By comparison, credit card originations grew 12.6% over the same period.  Even though the credit card market is still substantially larger — at 4x the origination volumes — personal loans are clearly on the upswing.

The numbers point to the common consumer still relying heavily on credit for big purchases.  Consumers fail to realize that loans provide more structure than their plastic counterpart, while also offering similar interest rates.  The average credit interest rate comes out to about 14.1%B.  A personal loan has an average interest rate of 15%C, but this rate gets much better with higher credit scores.  Factoring in debt consolidation makes loans all the more appealing, as centralizing debt is a huge benefit for the consumer.

Personal Loans are Heating Up

But banks are still missing out on a large portion of the loans market.

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Alt-Lenders, the Tail That Wags the Dog

While small, the growth in marketplace lending has pointed a way forward.  Alt lenders are growing to fill the evolutionary gap of lending.  These firms are offering easier, faster and more attractive ways to participate in lending. Consumers are interested in investing in these emerging firms, and as such, they’re driving innovation in the loans market.

Despite the upswing in this influx of assets, banks are still missing out on a large portion of the loans market.  As has already been discussed, the credit market greatly outnumbers the loans market in their current states, but loans are growing at almost double the rate.  Debt consolidation is a way to attract consumers who are being “double-dipped” by big FI’s.D  By collapsing debt into one loan, banks are putting themselves in a better position to get their money back. Additionally, banks should push for market control, because stagnation could mean trouble for these FIs, as although alt lenders are small, they pose an eventual threat for banks if they don’t evolve.

Why Should Banks Enter?

As the volatility of commercial loans continues to increase, it seems obvious that banks need to turn to a more secure consumer market to maintain and grow revenue sources.  These trends happen in cycles, but now is the time of the consumer, and investing in this market would surely be a safe bet.

Big players in banking have personally invested in alt lenders; clearly there is interest. Now it’s time for more FIs to invest on a wider scale in the loans market.E

 

  1. TransUnion Year-End Report. http://newsroom.transunion.com/transunion-us-delinquency-rates-remain-low-to-open-2016-though-energy-state-rises-beginning-to-have-greater-impact-on-nation
  2. BankRate Credit Cards. http://www.bankrate.com/credit-cards.aspx?ic_id=home_rate_credit-cards_globalnav
  3. BankRate Personal Loans. http://www.bankrate.com/funnel/personal-loans/
  4. Nerd Wallet, Debt Consolidation Loans. https://www.nerdwallet.com/blog/loans/debt-consolidation-loans/
  5. Euro Money. http://www.euromoney.com/Article/3551638/Marketplace-lenders-Old-hands-in-new-market.html