Heather Turner and her husband needed a few thousand dollars to jump-start the adoption of a teenager from Ukraine, and their timing was good: Lenders led by online firms have opened the spigot for personal loans, even if it comes at a steep price.

That could spell bad news for many credit unions, which have long touted the availability of personal loans at low rates.

Personal loans surged to a record this year and are the fastest-growing U.S. consumer-lending category, according to data from credit bureau TransUnion. Outstanding balances rose about 18% in the first quarter to $120 billion. Fintech companies originated 36% of total personal loans in 2017 compared with less than 1% in 2010, Chicago-based TransUnion said.

The Turners, of Lewiston, Maine, needed a speedy loan and didn’t want to borrow against their house or car. Heather Turner said LendingClub arranged a 3-year loan for less than $10,000 last October at an interest rate around 23% — similar to that of a credit card. Most notably, the loan is unsecured.

“Is it a perfect loan? No,” Turner said in an interview. “We didn’t expect some low-interest personal loan with no collateral.”

Web-based firms like LendingClub, Prosper Marketplace and closely held Social Finance, or SoFi, are driving the expansion of personal loans. LendingClub said in a filing that personal-loan originations in the first quarter soared 20% from a year earlier.

“A lot of credit goes to the fintech lenders for reinvigorating a loan category that’s been around forever,” Jason Laky, TransUnion’s consumer-lending business lead, said in an interview. “If you think about ‘It’s a Wonderful Life,’ George Bailey and his bank offered personal loans to the consumers. It’s a core banking product that’s been around since the beginning of banking.”

FIs fight back

According to the latest Credit Union Trends Report from CUNA Mutual Group, unsecured loans at CUs (excluding credit cards) totaled $40.9 billion as of April 2018, a 15 percent increase from April 2016. A host of experts have offered insights on how CUs can compete for this business with fintechs, and CUs have offered personal loans for a variety of items, including classroom supplies, season tickets for sporting events, adoptions, medical bills and more. And one recent TransUnion study even found those loans perform particularly well, with consumers electing to pay back personal loans before other consumer credit.

For-profit banks also have a piece of the market through online platforms including SunTrust Banks’ LightStream and Goldman Sachs Group’s Marcus.

“As a result of movements in technology, the opportunity in the consumer space has moved to us,” Goldman Sachs Chief Executive Officer Lloyd Blankfein said this month at the Economic Club of New York.

Such rapid growth has some analysts concerned about the potential for increased losses in consumer credit as interest rates rise. Total household debt in the U.S. hit a new peak in the first quarter, according to the Federal Reserve Bank of New York. Dean Athanasia, who runs Bank of America's consumer banking business, said this month his firm is keeping an eye on consumers “layering” debt by tapping multiple lenders.

Wells Fargo analyst Don Fandetti said consumers have turned to personal loans to consolidate debt and make large one-time purchases amid a reluctance to tap home equity after the credit crisis. For a newer player like Marcus or some fintech companies, it’s easier to offer personal loans than go head-to-head with credit-card lenders, which have an edge in brand awareness, he said.

Personal loans accounted for just 1% of the total outstanding consumer balance of $12.9 trillion in the first quarter, according to TransUnion. The lion’s share of consumer debt is from mortgages, at nearly $9 trillion outstanding, followed by student and auto loans. The personal-loan segment is poised to grow further as lenders pull back from areas such as credit cards and auto, Fandetti said.

To be sure, not everyone is piling in. Discover Financial Services is among lenders that have scaled back on personal loans. CEO David Nelms said at a conference this month that some fintechs “maybe get a little carried away on pricing and credit.”

Aaron Passman contributed to this report.

Bloomberg News