Effectively Tapping Into Emerging UPL Demand

The COVID-19 pandemic profoundly impacted consumers and commerce.  The crisis and resulting shutdowns drove unprecedented changes in borrowing trends. Today, understanding consumers’ financial and lifestyle changes is even more crucial for lenders.  Leveraging multiple data types will enable lenders to re-engage the right consumers at the right times as optimism and economic growth fuels demand.

Consumer demand is recovering faster than expected

During the early days of the pandemic, similar to other loan types, unsecured personal loan (UPL) originations declined dramatically. Q2 2020 marked the first time in years without quarter-over-quarter growth in the number of consumers with a UPL balance[1]. Similarly, Q2 2020 originations fell to their lowest point during the pandemic: 46% below the same quarter the prior year[2]. However, the pullback is subsiding as the country starts to recover from the economic downturn.

The proportion of fully vaccinated Americans is leading to more states lifting restrictions on public gatherings, though some precautions are being reinstated due to COVID-19 variants. This contributes to rising consumer spending and economic growth. Per Chart 1, several indicators of economic health have already recovered substantially: initial jobless claims are falling, and consumer sentiment is far outpacing the prior year. These burgeoning trends will likely lead to consumers seeking UPLs as their expenditures increase.

Chart 1

Source: FRED

UPL borrowing is on track for a comeback

UPL originations are already climbing from the low point reached in Q2 2020, with Q1 2021 marking the third consecutive quarter where year-over-year decline was less steep[3]. This upward trend coincides with prescreen volumes rising. Per Comperemedia direct mail volume estimates in Chart 2, direct mail volumes (especially prescreen) had been declining since 2019. Starting in the second half of 2020, prescreen volumes rebounded and UPL originations are behaving similarly, accounting for seasonality. Additionally, mail volumes for invitations to apply (ITAs) rebounded slightly. The resurgence in consumer economic activity is helping grow interest in and usage of UPLs.

Chart 2

Our Q2 2021 Consumer Pulse Survey showed a clear interest among UPL borrowers to seek new credit. Per Chart 3, a third of respondents plan to seek new credit or refinance existing credit within the next year. Strikingly, many more current UPL borrowers are credit hungry.

Chart 3

Understanding consumer behavior will be vital as demand comes back

Personal lenders are now presented with a high-potential pool of possible customers to engage through marketing efforts. Leveraging a breadth of data insights that account for pandemic-related changes in consumer behavior helps identify those best fitted to lenders’ offerings. Specifically, trended credit data, alternative credit data, and non-credit marketing data can provide valuable insights for various types of personal loan marketing campaigns.

Trended credit data provides insights on changes over time, even with forbearance

With all that’s changed in consumers’ financial lives since the crisis began — from unemployment rolls fluctuating to a record number of consumers in loan forbearance programs (UPL peaking in June 2020 when 7% of these accounts were in forbearance[4]) — traditional models may not account for all these changes. Trended credit data delivers a more comprehensive view by providing visibility into consumers’ payment patterns and behaviors over time.

Additionally, the depth of trended data-based models can match industry benchmarks even without the use of delinquency data. Per Chart 4 below, when applying different models against performance archives from the COVID-19 pandemic, the models leveraging trended data (i.e., VantageScore 4.0 and the Experimental Model) performed the best as they have capacity to compensate for any suppressed delinquency signals due to wider use of forbearance.

Chart 4

Alternative credit data provides a more holistic view of consumers’ credit performance

Understanding consumers’ engagement in alternative financing can be beneficial too. In our Q2 2021 Consumer Pulse Survey, existing UPL borrowers planning to seek credit within the next year were 53% more likely to report using alternative financial products* in the past 12 months than the broader, credit-seeking survey population. Understanding usage and performance on alternative credit products will allow lenders to get a more comprehensive picture of the consumer, enabling more tailored outreach or underwriting.

Marketing data provides a better sense of consumers’ lifestyles

Lenders also need to tailor their messaging to consumers’ current situations. Per our Q2 2021 Consumer Pulse Survey, 49% of consumers with a UPL who plan to seek credit within the next year reported the COVID-19 crisis made them change how they earn money (versus 34% for the broader survey population that plans to seek credit).** That is a significant portion of consumers who have changed/added jobs (and by extension, changed their lifestyle) due to the pandemic. TransUnion’s multifaceted marketing data provides visibility into potential borrowers’ non-credit related background — like their household composition and preferences/interests or hobbies — which can prove valuable for targeting.

As COVID-19-lingers, the needs of many financial services consumers continue to evolve. A thorough understanding of how the pandemic has impacted each individual will help enable lenders to better serve their unique needs and yield better returns on marketing campaigns.

*NOTE: Defined as respondents who said they or someone in their household had used any of the following financial products or services in the past 12 months: Tax refund anticipation loan or tax preparation service to receive tax refund faster than normal; Payday lender or payday advance; Auto title loan (i.e., used a car title to borrow money for a short period of time); Pawn shop loan; Rent-to-own services. Calculated the average percentage change between UPL borrowers and all survey respondents across those products who said they were planning to apply for new credit or refinance existing credit (e.g., mortgage, auto loan/lease, credit card, personal loan, student loan) within the next year.

**NOTE: Defined as the difference between 100% and the percentage of respondents who selected “Nothing has changed” or “Not applicable/I don’t have an income” when answering the question: “Has the COVID-19 pandemic made you change how you earn money? (Select all that apply)”

[1] TransUnion US consumer credit database

[2] TransUnion US consumer credit database

[3] TransUnion US consumer credit database

[4] TransUnion Monthly Industry Snapshot from July 2020