Consumers Are Tapping Credit and Personal Loans to Cover Expenses as Interest Rates and Inflation Impact Finances

Since mid-2021, the industry has seen record levels of originations in credit cards and unsecured personal loans. Now, inflation and rising interest rates could be driving many consumers to use those resources to cover the cost of living, according to TransUnion’s new Q1 2023 Quarterly Credit Industry Insights Report (CIIR).

“Many consumers have used credit to help manage their budgets, leading to record- or near-record-high balances,” said Michele Raneri, Vice President of US Research and Consulting at TransUnion. “It remains to be seen whether these balances will continue to grow in the near term, or if growth will slow as consumers moderate their pace of borrowing and lenders more closely scrutinize consumers.”

To learn more about the latest consumer credit trends, register for the Q1 2023 Quarterly Credit Industry Insights Report Webinar. Read on for more specific insights about credit cards, personal loans, auto loans and mortgages.

Consumer credit trends in the credit card sector: Q1 2023

In Q1 of 2023, bankcard balances remained at near-record highs at $917 billion, representing significant YoY growth of 19.2%.

• Following the historic trend of seasonal drops in the first quarter of each year, balances were down 1.5% QoQ
• The share of subprime consumers with a balance declined to 10.2% (down from 10.9% the previous quarter), ending a trend of seven consecutive quarters of growth for this segment
• The share of super prime tier consumers with a balance increased to 41.8% (up from 40.6% a quarter ago)
• Millennials continued to see their share of balances grow (up to 28.6% in Q1 2023) compared to one year prior (26.5%)
• Total credit lines increased 9.7% and reached $4.4 trillion in Q1 2023 (an increase of $391 billion YoY)
• High growth in credit lines was observed across the risk spectrum, but 60% of the increase was driven by super prime borrowers
• Q4 2022 new account originations stood at 20.64 million, representing a decline of -3.9% YoY and -4.3% QoQ, with much of the impact being driven by a -19% YoY decline in subprime originations
• Bankcard 90+ DPD consumer-level delinquency remained flat QoQ at 2.26%, but is still up significantly from levels seen in the first quarter of 2022

Our view: While bankcard originations were down slightly YoY and QoQ, they still topped 20 million for the fifth time over the course of the past six quarters. That coupled with growing balances indicates consumers are turning to credit to overcome financial challenges brought on by high inflation and interest rates.

Q1 2023 Credit Card Trends 

*Note: Originations are viewed one quarter in arrears to account for reporting lag.

Consumer credit trends in the unsecured personal loan sector: Q1 2023

In Q1, rising interest rates and delinquencies pushed lenders to continue to tighten lending criteria and focus more on lower-risk consumers. We saw a 8.7% YoY decrease in Q4 originations and deceleration of increases in total unsecured personal loan balances. It’s worth noting originations were at record highs one year ago, so while growth has slowed, Q4 2022 originations were still strong — on par with Q4 2019 levels (a record high pre-COVID).

• Unsecured personal loan balances were up 26.3%, but it was the second consecutive quarter of lower YoY growth rates, largely driven by the prime and below risk tiers, all of which demonstrated negative YoY growth.
• The YoY decline in originations was largely driven by the prime and below risk tiers, all of which demonstrated negative YoY growth. Subprime borrowers experienced the most significant decline, down 18.2% YoY.
• Balances grew YoY across all risk tiers; each saw double-digit balance growth as the market continued to expand following record growth starting in mid-2021 through 2022.
• Subprime saw the highest growth in balances at 40%, while prime plus saw the slowest growth in balances at just below 20%.
• The average balance per consumer in Q1 2023 rose to $11,281, its highest level on record.
• The average size of new accounts increased by nearly 11% YoY to $7,368.

Borrower-level 60+ DPD delinquencies increased in Q1 2023 to 3.91%, up 20.5% over the prior year, although it did represent a 5.4% decrease from the prior quarter. 

Our view: Investors will continue to express a preference for lower-risk, shorter duration loans. Unsecured personal loans will be appealing assets, but the shift toward lower risk consumers will be apparent. In response to limited funding, expect lenders to focus on retaining existing borrowers to keep their costs of acquisition low, and limit risk by increasingly working with known borrowers with good track records.

Q1 2023 Unsecured Personal Loan Trends

 *Note: Originations are viewed one quarter in arrears to account for reporting lag.

Consumer credit trends in the mortgage sector: Q2 2022

Mortgage balances reached a record level ($11.8T) while the slowdown in mortgage originations continued to accelerate, down from to 2.9M in Q4 2021 to 1M in Q4 2022, representing a 65% YoY drop and the largest decline since TransUnion has been tracking this data. 

• Purchases made up 86% of originations in Q4 2022; 900,000 originations (down 45% YoY from 1.6M in Q4 2021)
• Refinance originations fell by 89% YoY from 1.3M to 143,000, the lowest level to date, driven by the dramatic decrease of rate and term refinances (down by 96% YoY from 588K in Q4 2021 to 24K in Q4 2022) and cash-out refinance originations (down by 83% YoY from 716K to 120K)
• HELOC originations were up 7% YoY to reach 299K in Q4 2022, while home equity loan originations grew 31% YoY to 264K
• Mortgage delinquencies ticked up YoY; account-level delinquencies (60+ days past due) grew 12% to 0.98% in Q1 2023, though they remained at very low levels historically

Our view: The relatively higher interest rate environment has depressed mortgage refinancing. Interestingly, cash-out refinance hasn’t been as impacted as rate and term refinance. This coupled with the increases observed in HELOC and home equity loan originations indicates homeowners are still interested in tapping their home equity, even at higher interest rates. It’s also encouraging that purchase originations remained near the lower end of the normal activity range, indicating consumers are continuing to purchase homes.

Q1 2023 Mortgage Trends 

* Originations are viewed one quarter in arrears to account for reporting lag.

Consumer credit trends in the auto sector: Q1 2023

Driven by lower inventories and higher interest rates, originations remained down from the same quarter one year ago.

• Originations in Q4 2022 were down 9.7% YoY to 5.9 million (the lowest level since Q4 2013), with each risk tier reflecting decreases between 10% and 13% YoY, except for super prime (down only 1%)
• When compared to pre-pandemic Q4 2019, originations were down across all risk tiers; subprime (-17.8%) and super prime (-15.9%) led the way
• The new vs. used split remained steady with used cars making up 60% of all car purchases in Q1 2023
• Leasing continued to lag only accounting for 18% of new vehicle registrations (down from 20% YoY)
• Average amount financed for new vehicles was up 3.4% YoY, while average amounts financed for used vehicles were down 2.6% YoY
• Monthly payments were up YoY for both new cars (+11.9%) and used cars (+3.9%)
• The account-level 60+ DPD delinquency rate rose to 1.69%, up from 1.43% YoY
• Vintage performance, which reflects the performance of an account in different periods of time after the loan was granted, continued to show relatively strong results; new vintages remained at pandemic-era lows and performed better than pre-pandemic levels

Our view:  As production begins to catch up to demand, there’s hope originations of new vehicles will begin to increase. The used market is expected to remain tight as the lower level of new vehicle sales that started in 2020 means fewer recent model year, used vehicles are available. Affordability remains a central issue for consumers, especially for those below prime.

Q1 2023 Auto Loan Trends 

*Note: Originations are viewed one quarter in arrears to account for reporting lag.

**Data from S&P Global MobilityAutoCreditInsight, Q1 2023 data only for months of January & February

For more information about the report, please register for the Q1 2023 Credit Industry Insight Report webinar.

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