Banks have already faced interest rate pressures on personal loans from the likes of SoFi and Marcus, and new data shows that credit unions are also taking a bigger slice of that loan pie.
Credit union loan balances rose 2.3% in May, and unsecured personal loans led the way with monthly growth of 3%, according to a report by CUNA Mutual Group, an insurance and financial services company that oversees the credit union industry. released this month.
“Many members of the credit union used to be in debt interest rates rise In addition [to combat inflation] and consolidate other loans. We expect this trend to continue over the next six months before slowing in 2023 when interest rates will peak,” said Steve Rick, chief economist at CUNA Mutual Group.
Unsecured lending grew 13% in the first six months of 2022, compared to a 0% compound annual growth in the first six months of 2021, Rick said.
One of the credit unions that is getting more unsecured loan applications is the North Country Federal Credit Union in South Burlington, Vermont.
Personal loans for the $908 million credit union are up 7.2% year-to-date, according to CEO Bob Morgan. But the surge may not be solely due to new borrowers coming through the doors.
“I think the reason consumer credit is growing faster in 2022 is more due to fewer mortgage refinance payouts than a surge in lending,” Morgan said. “This results in slower portfolio churn and a faster growth rate.”
Morgan said personal lending is a “highly competitive” market between banks, other credit unions and fintechs. “Players like SoFi and Marcus have as much or more influence over rates as credit unions,” he said.
Banks active in this space see the impact of new entrants. Stephen Varckette, president and CEO of Andover Bank in Andover, Ohio, said personal lending activity for the $581 million wealth bank has kept at a “fairly normal” pace due to increased competition.
“There are a lot of non-traditional options out there for consumers these days,” Varckette said. “I expect them to gain popularity.”
A combination of factors — the removal of government COVID-19 support, the rising cost of basic necessities and a smaller disposable income pool — are forcing more consumers to seek personal credit to make ends meet.
But these borrowers are scrambling to find the best deals as interest rates continue to rise.
The average interest rate for personal loans increased from 10.41% in early May 2022 to 10.60% as of July 20, 2022, according to Bankrate.com. Consumer loan rates are likely to rise further if the Fed hikes interest rates again at its next meeting, the company said.
When Interest on Deposits well below inflation, there is little incentive to save. In fact, today it can be cheaper to buy than borrow the money, said Tim Scholten, founder and president of credit union and community banking consultancy Visible Progress.
So why would this lead to more unsecured debt?
An alternative would be to refinance a mortgage to raise equity, but that’s less attractive today due to higher interest rates – making unsecured debt the next best option, Scholten said.
“Rather than increasing the interest rate on the entire mortgage, it’s more cost-effective to take out an unsecured loan with a higher interest rate,” Scholten said. “Knowing that things will cost 10% more next year than now, it makes sense to buy now with borrowed money and pay it back with inflated dollars.”
Inflation really got going in 2022, but salaries haven’t adjusted much yet. At the same time, property values have risen dramatically, and increases in property taxes are taking a heavier toll on paychecks, Scholten said.
As a result, many consumers need more money at the end of their month and use debt to solve the problem.
“I expect this trend to continue as long as banks and credit unions continue to offer unsecured loans at reasonable rates,” Scholten said. “Inflation under current conditions gives consumers a lot of incentive to spend and little incentive to save.”
Vincent Hui, managing director at Cornerstone Advisors, said the company has seen an increase in credit card use — an alternative to taking out more borrowing — but nowhere near the levels that secured loans like auto and mortgage loans have reached recently.
“Inflation is a factor as it reduces discretionary spending and people need to borrow,” Hui said. “In any case, overall lending is likely to slow as interest rates rise, making monthly payments less affordable for people.”
Scholten spoke of popularity Buy now/pay later Credit is also undoubtedly having some impact in the personal lending space for credit unions and banks, although he said how much, exactly, is difficult to gauge.
“I think BNPL growth is an indicator of the current mindset of consumers,” Scholten said.