Chicago,
17
May
2017
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12:00 PM
America/Chicago

Consumers Place Personal Loans Atop the Credit Mountain

New TransUnion study finds struggling consumers who possess multiple credit products tend to pay their unsecured personal loans first

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 Study

TransUnion 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.

About TransUnion (NYSE: TRU) Information is a powerful thing. At TransUnion, we realize that. We are dedicated to finding innovative ways information can be used to help individuals make better and smarter decisions. We help uncover unique stories, trends and insights behind each data point, using historical information as well as alternative data sources. This allows a variety of markets and businesses to better manage risk and consumers to better manage their credit, personal information and identity. Today, TransUnion has a global presence in more than 30 countries and a leading presence in several international markets across North America, Africa, Latin America and Asia. Through the power of information, TransUnion is working to build stronger economies and families and safer communities worldwide. We call this Information for Good. http://www.transunion.com/business

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photo:Dave Blumberg
Dave Blumberg
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