As consumer financial lending grows exponentially, personal loans surpassed even credit card lending in the past year. These unsecured loans were once shunned as too risky, but now the market is shifting as more and more large financial institutions begin to open up the market to subprime consumers by offering large personal loans.
There are quite a few factors that can lead to subprime credit status for consumers, and make it difficult for them to be accepted for more traditional loans: young people without a long credit history; a typically reliable consumer who's recovering from a financial loss such as a job loss or unexpected expenses; a consumer who has a poor history with credit responsibility in the past, etc. Consumers such as these may rely on personal loans in order to manage monthly expenses and make it through periods of financial instability.
Loan Channel and Type Trends
The primary loan channels are currently dominated by online lenders and growing. Brick and mortar lenders are still key players, however, and many are supplementing the online boom by expanding services to include online pay, and promoting the personal care provided by a storefront location. Online lenders saw an increase of almost 500% in online installment loan volume in the past four years, with a growth of almost 100% in single pay loan volume in the same time period.
When it comes to loyalty within loan channels; many of those who opened storefront loans were also applying for online credit, with online applications increasing in the following years. The average borrower who opened storefront single pay loans and continued to apply online was 45 years old with a monthly income of $1,980. In the last year, more than 17% of original storefront borrowers were seeking online credit, averaging 13 inquiries in a year. Most of these borrowers of storefront single pay loans applied for online installments over time. On average, a third of those who borrowed from a brick and mortar lender shifted to seeking online loans.
When it comes to loan types, online installment loans - those structured to be repaid over a period of times in a series of payments - are increasing at a steady pace year after year. Online single loan pays - those repaid in one lump sum payment over a shorter time period - are remaining steady, but are typically lower amounts and are currently on a downward trend. Storefront installment loans have significantly decreased in comparison with online lenders, with less loans per borrower and lower loan amounts. Storefront single pay loans on the other hand, tend to beat out those online, with higher loan amounts and more loans per borrower. One reason that online installment loans are increasing is the implementation of direct mail marketing, with direct mail campaigns that offer larger loans to pre-qualified borrowers, based on their credit history.
One big shift in personal lending is the credit quality and loan performance in the market. Ina a year over year comparison of cumulative defaults, After 6 months of aging, cumulative default rates went from 30% in 2015 down to 20% in 2017 -- the conclusion being that defaults are actually declining year-over-year.
When it comes to the subprime market sphere, consumer stability is one of the factors that influences their future loan performance. Risks are more commonly associated with a consumer who frequently changes their mobile phone number, bank account, or home address: someone who applies with three or more bank accounts on loan applications over the course of a year is 28% more likely to default on their loan. This also depends not just on how many bank accounts a consumer changes, but how recently the account became active. In the past year, consumer stability has remained fairly consistent, with 90% of the population making no changes to their mobile phone number, bank account, or home address.
Below is a break out of distribution by channels among the defining generations:
In relation to the size of the generation, millennials open more loans per person than any other age group, accounting for 34% of loans, while being 25% of borrowers.
When it comes to income, those who obtained installment products in the past year tended to have higher incomes than those who sought single pay products. 35% of online installment borrowers reported an annual income over $40,000; while only 25% of single pay borrowers reported incomes in the same range. On the flip side, 30% of single pay borrowers have an income less than $20,000, as opposed to only 20% of installment borrowers.
The top states for online loans are California and Texas, partially due to their large population size. States such as Ohio and Florida experienced slow but consistent growth over the past few years, while Michigan and Oklahoma experienced a sharp growth, showing a online small-dollar installment loan surge in the Midwest region.
- Personal loans are on the rise, with online lenders dominating the market and showing signs of continual growth as compared to declines among brick and mortar lenders
- Online installment loans are the fastest growing loan type over the past five years, with an almost 500% increase
- Defaults are declining year over year, with 90% of the population displaying characteristics not associated with risky borrowers
- Storefront borrowers are shifting to online lending, with 1/3 already having made the transition in the past five years
- Millennials are leading the market for personal loans, opening more loans per person than any other age group
- The Midwest is experiencing a surge in online installment loans