The narrative sometimes pushed by critics of subprime auto finance is that consumers who encounter financial problems in part because of their substantial vehicle payment turn to personal loans with interest rates sometimes higher than the ones connected to the risk associated with their retail installment contract.
Well, information from the Federal Reserve Board’s latest Report on the Economic Well-Being of U.S. Households showed personal loan usage for a $400 emergency would be the route used by just 5% of the consumers surveyed.
And the latest personal loan metrics from TransUnion indicated personal-loan growth is originating from the opposite end of the credit spectrum from subprime.
The Federal Reserve asked 11,000 adults in 2018 this question: “Suppose that you have an emergency expense that costs $400. Based on your current financial situation, how would you pay for this expense?”
The survey showed 45% of respondents would use money currently in a checking or savings account or with other available cash. Another 33% of participants said they would put the expense on a credit card and pay it off in full at the next statement.
While 12% of individuals surveyed that they wouldn’t be able to pay that $400 expense immediately, just 3% said would use money from a bank loan or line of credit as another and 2% said they would choose a payday loan, deposit advance or overdraft.
Overall, Federal Reserve officials highlighted the financial experiences reported by the adults surveyed were largely positive, and many families have experienced substantial gains since the survey began in 2013, in line with the nation's ongoing economic expansion.
When asked about their overall economic well-being, 75% of U.S. adults said they were “doing OK” or “living comfortably,” which was up 12% from 2013.
However, TransUnion’s Q1 Industry Insights Report showed that personal loans are on the rise.
TransUnion reported personal-loan balances grew 19.2% year-over-year to a new high of $143 billion. Over the past four years, total balances have nearly doubled, expanding from $72 billion in Q1 2015.
Analysts pointed out that growth is occurring across all risk tiers with originations increasing 9.7% to 5.0 million in Q4 2018. Super prime borrowers had the largest growth on the origination front with an increase of 22.5% year-over-year, compared to 19.5% over the same period last year.
TransUnion also mentioned subprime and near-prime originations continued to grow, although at a more modest pace: 10.0% and 6.4%, respectively.
Amid unprecedented growth in this category and higher average balances, TransUnion added that the percentage of borrowers seriously delinquent — more than 60 days past due — stood at 3.47%, which represented a record low for the first quarter.
“Personal loans remain one of the highest growth areas of consumer credit, with originations increasing 10% in the fourth quarter and balances by 19% in the first quarter,” said Liz Pagel, senior vice president and consumer lending business leader at TransUnion.
“Super-prime and prime-plus consumers are leading the growth in originations and balances, as consumers in general continue to use personal loans for debt consolidation and to finance home improvement,” Pagel continued in a news release.
“In spite of the uncertainty created by stock market volatility and the partial government shutdown at the end of last year, job creation and wage growth remain strong, and overall borrower serious delinquency is at the lowest first-quarter rate we’ve seen in the past several years,” she went on to say.
Despite the improved finances of many adults, Federal Reserve officials acknowledged their survey continued to detect areas of financial distress as well as persistent differences by race, education level, and, in some cases, geography.
Nearly 8 in 10 whites reported doing at least OK financially, compared to two-thirds of blacks and Hispanics. A similar difference exists by education: among those with a bachelor’s degree or higher, 87 percent were doing at least OK, compared with 64 percent of those with a high school degree or less.
Of those who live in middle- and upper-income neighborhoods, 8 in 10 reported overall satisfaction with their community, compared to 6 in 10 of those living in low- and moderate-income neighborhoods.
The report draws from the Fed’s sixth annual Survey of Household Economics and Decisionmaking (SHED), which was conducted in October and November 2018 and examined the financial lives of U.S. adults and their families. Respondents described their experiences on a wide range of topics including income, employment, dealing with expenses, banking and credit, housing, education and retirement.
Officials explained the responses were weighted to be nationally representative of adults, aged 18 and older, in the United States.
“As this report shows, we continue to see the growing U.S. economy supporting most American families,” Federal Reserve Board Governor Michelle Bowman said in a news release.
“At the same time, the survey does find differences across communities, with just over half of those living in rural areas describing their local economy as good or excellent compared to two-thirds of those living in cities,” Bowman continued. “Across the country, many families continue to experience financial distress and struggle to save for retirement and unexpected expenses.”