These days, it seems that what’s old is new again.
Recently, VantageScore’s Dr. Emre Sahingur was quoted in a Wall Street Journal article, reporting that an age-old credit product, that lenders scaled back dramatically during the COVID-19 pandemic, has had a resurgence: the personal installment loan. A personal installment loan is a type of loan that the borrowers pay back in monthly installments over a set period of time.
This type of loan often is a product marketed by very sophisticated fin-tech lenders who use new-aged underwriting and data to drive decisions.
BACK TO PRE-COVID LEVELS
Personal installment loan balances in some consumer segments are higher than pre-COVID era timeframes. But is this a sign that consumers are feeling good and able to take on more debt or are consumers needing credit because savings accounts have dwindled?
As the table below indicates (see line items highlighted in yellow), it does appear that lower-income consumers are acquiring more personal loans:
This increased usage could be a function of lenders lowering their underwriting criteria, approving more lower-income consumers (and also more lower credit tier consumers) as well as an increased demand from lower-income consumers.
TIME TO WORRY?
The good news so far is that there does not appear to be a significant increasing trend in delinquency levels for lower-income consumers. However, financial institutions and risk management professionals should monitor this trend closely. Many of these consumers have benefited from loan accommodations that continue to allow them to skip student loan payments. And especially as the Federal government attempts to cool inflation by raising rates, the pressure on these consumers’ ability to meet monthly obligations could increase.