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Are Personal Loans Riskier in a Recession?

John Wirth
Blog Post07/27/2020
Credit Trends and Reporting Public Affairs
Are Personal Loans Riskier in a Recession? image

As the COVID-19 pandemic impacts unemployment and the economy, lenders are exploring what this means for consumer credit performance for 2020 and, potentially, 2021. A prevalent belief is that personal loans are a lot riskier for lenders than other loan types, especially cards. Given the broad adoption of the personal loan, many believe FinTechs are potentially riskier in today’s environment.

The common thinking is that less risky consumers are more likely to receive card offers from banks and credit unions. Proponents of this view believe that consumers are likely to prioritize paying down their card balances to remain on good terms with their card issuer and protect their access to additional credit. Often, personal loan performance from the Great Recession is used to support this theory.

But the personal loan market today is very different than it was in the recession. There are more lenders promoting personal loans and many are extending the product into new uses such as home improvement, solar, and purchase financing. As a result, personal loans have grown in popularity. In Q1 2020, 20.9 million consumers had an unsecured personal loan, up more than 5 million from just 3 years prior when 15.7 million consumers had a personal loan in Q1 2017.[1]

Additionally, a broader makeup of consumers has a personal loan than in the Great Recession. In 2018 and 2019, personal loan lenders increased their focus on less risky consumers in the prime and above risk tiers.[2] As of Q2 2020, 53% of consumers with a personal loan were prime and above, up from 40% in Q3 2007 before the recession.[3] This has increased the need for prime lenders to identify consumers at risk of delinquency earlier in today’s dynamic environment.

As our customers stabilize their business in response to COVID-19 and prepare for the future, we explored personal loan and card performance during the Great Recession.

Personal Loan and Card Delinquency Rates During the Great Recession

Before we compare personal loan and card delinquencies, we first need to address sample design. Typically, delinquencies are reported by a consumer’s current VantageScore tier — subprime, near prime, prime, prime plus, and super prime — at the time of the latest delinquency status. The implication of this approach is that delinquent consumers move to the riskier credit tiers as their delinquency status progresses, which leads to a thinning of delinquent consumers in prime tiers. This dynamic accentuates the subprime and near prime delinquencies and obscures true loan performance.

To gain greater clarity into delinquencies — which can help us compare personal loan and card performance — we analyzed a cohort of consumers with an existing bankcard or unsecured personal loan. [4] Then, we compared future delinquency performance, but segmented for risk using consumers’ risk tier prior to the downturn.  By freezing these credit tiers, we can more effectively evaluate how delinquencies accelerated within each tier over the same vintage performance. When we explored delinquency rates with this approach, here’s what we found for existing personal loans and bankcards as of Q3 2007.

Cumulative 90 DPD+ Rate as a percentage of 2007Q3 portfolio- Unsecured Personal Loans

Archive

SUBPRIME

NEAR PRIME

PRIME

PRIME PLUS

SUPER PRIME

Total

2008q1

12.29%

1.24%

0.46%

0.12%

0.04%

4.03%

2008q3

15.38%

2.33%

0.98%

0.23%

0.12%

5.36%

2009q1

17.60%

3.62%

1.52%

0.40%

0.20%

6.50%

2009q3

19.21%

4.68%

2.22%

0.64%

0.27%

7.45%

2010q3

20.95%

5.69%

2.86%

0.97%

0.36%

8.42%

Cumulative 90 DPD+ Rate as a percentage of 2007Q3 portfolio- Bankcard

Archive

SUBPRIME

NEAR PRIME

PRIME

PRIME PLUS

SUPER PRIME

Total

2008q1

17.49%

1.52%

0.34%

0.07%

0.01%

2.06%

2008q3

25.51%

4.26%

1.03%

0.22%

0.04%

3.40%

2009q1

32.71%

8.25%

2.44%

0.53%

0.09%

4.99%

2009q3

37.56%

12.13%

4.24%

1.00%

0.16%

6.43%

2010q3

43.67%

17.49%

7.22%

1.97%

0.32%

8.54%

Note: For this study, the Q3 2007 cohort included consumers who had an existing bankcard or an unsecured personal loan. Risk tiers were fixed as of Q3 2007. The analysis uses VantageScore 3.0 risk ranges: Subprime= 300-600; Near prime= 601-660; Prime= 661-720; Prime plus= 721-780; Super prime= 781-850.

In this analysis, we found that all risk tiers of the Q3 2007 cohort had higher delinquency rates during the Great Recession in both personal loans and cards. Cumulative subprime delinquencies (90 days or more past due) were the greatest for both unsecured personal loans and card. But by referencing delinquency rates by risk tier pre-recession, we gain additional insight that is often hidden when examining recession delinquency rates. Looking at these delinquency figures, we can now observe that serious delinquencies for personal loans in Q4 2010 were slightly lower than card.  Our findings demonstrate that at least during the last downturn, personal loans did not underperform card. 

It is difficult to say whether we should expect to see similar loan performance in today’s environment, given personal loan lenders’ focus on the prime and above risk tiers in recent years. Additionally, the prevalence of auto pay for personal loans today could produce better overall performance. While no two recessions are exactly alike, our analysis shows that personal loans were not inherently riskier than card during the last recession.

[1] Source: TransUnion’s Q1 2020 Industry Insights Report

[2] VantageScore 3.0 risk ranges: Subprime= 300-600; Near prime= 601-660; Prime= 661-720; Prime plus= 721-780; Super prime= 781-850.

[3] Source: TransUnion’s Q1 2020 Industry Insights Report

[4] Source: TransUnion’s consumer credit database

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