The personal loan is hip again.
Well, let's not get too carried away. Just 4.33% of millennials ages 21 to 34 took out unsecured personal loans in 2015, according to a recent analysis by TransUnion. But that is nearly twice the rate of their Generation X predecessors when they were that age — and that’s good news for credit unions.
Though financial institution-issued credit cards (19.5%), private-label credit cards (15.28%) and mortgages (5.16%) have greater penetration rates among millennials, according to TransUnion, those market shares were much lower than they were with Gen Xers back in 2001. In other words, millennials took out fewer mortgages and credit cards and relied more heavily on personal loans and auto loans, the data shows.
What explains the uptick in the old-fashioned personal loan? The rise of online lenders appears to have played a big role. TransUnion combed through anonymous consumer credit data and concluded the increasing digitization of financial services, coupled with millennials’ comfort with technology, contributed to overall changes in that generation’s credit preferences.
Personal lending has always been around, said Ezra Becker, senior vice president of research and consulting at TransUnion, but for many banks and credit unions, this niche was historically neglected in favor of mortgage and auto lending. Then along came online lenders and fintech companies.
“You don’t have to go into a branch and bare your soul across the desk to somebody. It’s a process that is more attractive to those who are nervous about whether they’re going to get accepted,” Becker said. “‘The message is, ‘We are cool and we respect you and we want to empower you.’ And it’s a smooth process. You can upload documents and get an answer and get funded within an hour.”
CUs seeing growth
Credit unions — many of which have long offered signature loans that many banks aren't willing to make due to low profitability when compared with other product lines — also continue to see growth in the personal loan space.
According to the August Credit Union Trends Report from CUNA Mutual Group, as of June 2016, credit unions were managing $38.8 billion in unsecured loans — including, but not limited to, personal loans — an increase of 7.3 percent from last year.
While CUNA Mutual’s data doesn’t break down borrowers by demographic, credit unions have seen a massive influx of new members in the last five to seven years — many of them millennials disillusioned by the big banks’ attitudes toward consumers and the behaviors that led to events like the financial crisis and, more recently, the Wells Fargo scandal.
“That millennial generation is the future pipeline for credit union lending in the next 10 years,” CUNA economist Steve Rick said.
On top of that, said Rick, the baby boomer demographic has largely moved out of its borrowing years and begun saving more, whereas millennials are primed for lending.
“If you look at a typical credit union and you see what proportion of their customers are millennials and what proportion are baby boomers, you get a good indication of their loans to savings ratio,” Rick said.
Personal loans take up a larger percentage of their loan portfolios than they do for banks. It’s also less risky for credit unions to give out unsecured loans. “Since they know their membership a little bit better, they are more likely to give out personal loans,” Rick said. “Knowledge of the borrower helps them make more unsecured loans.”
Old product, new opportunities
Citing a previous TransUnion analysis of its consumer credit database, Becker said that fintech companies' market share of personal loans grew from just under 1% in 2010 to around 30% last year. TransUnion did not dig into exactly how those consumers used personal loans — be it to fund a new business or pay for a wedding. And much like credit cards, the interest rates on unsecured personal loans depend on borrowers' risk tiers, Becker said, citing a different study by TransUnion.
TransUnion’s findings should be of interest to bankers, as millennials enter their peak spending years. Some banks have turned their attention to personal lending, too. TD Bank and WSFS Bank in Delaware are among those that offer unsecured personal loans, typically between $2,000 and $15,000. SunTrust Banks offers unsecured personal loans between $5,000 and $100,000, through its LightStream division.
Fifth Third also does unsecured personal lending through its partnership with GreenSky. In an interview with American Banker earlier this year, CEO Greg Carmichael indicated the company would be investing in technology so it could ramp up personal lending through its branches as well. And Citizens Bank makes unsecured personal loans through partnerships with Apple, Vivint and HP.
FIs home equity lines of credit and credit cards could compete with personal loans, too, Becker said. For those consumers who have equity in their homes, HELOCs can be a more attractive option than a personal loan for lower interest rates and the tax deduction on that interest.
And credit cards could compete with personal loans, too — if those lenders can figure out how to market to millennial consumers.
TransUnion’s analysis found that when compared with Gen X consumers during their younger days, millennials also carried two fewer bank cards and private label credit cards on average, and they often carry smaller balances on those cards.
One hypothesis is that millennial consumers, who began to enter the job market during the aftermath of the financial crisis, are simply gun-shy about taking on too much credit card debt. Another explanation could be the CARD Act of 2009, which severely restricted credit card marketing toward college students; and Becker said the ascendancy of debit cards is yet another. TransUnion pointed to Federal Reserve data showing that debit card transactions increased from 8 billion to 60 billion between 2000 and 2015, while credit card transactions increased from 16 billion to 34 billion over that same time frame.
“We really are a product of our times,” Becker said. “The way in which you’re brought up really guides and influences how you perceive credit and use credit.”