| The explosion of fintech has credit cards declining and personal loans trending.
That’s according to a recent study published by the credit information company TransUnion that looked at credit origination trends between Millennials and Generation X.
The study analyzed the borrowing trends of both generations when they were between the ages of 21 and 34 – Gen X credit trends were examined in 2001 and Millennials in 2015.
The findings from the study show that Millennials on average carry two fewer bank cards and private label cards than Gen X, but take out higher interest rate, no-collateral personal loans at nearly double the rate of the preceding generation.
“Personal loans are definitely becoming more common as a result of fintech companies like Lending Club and Prosper that are making it affordable to get an attractively priced personal loan for any purpose,” Ben Malka, a partner at F-Prime Capital who focuses on fintech investments, told Banker & Tradesman.
Increasingly Common
The origination rate of personal loans to Millennials in the study was still marginal at 4.33 percent in 2015, but the product is only expected to gain in popularity as the generation ages. “Younger borrowers offer lenders more growth opportunities in the future, as the largest volume of loan originations occur the decade after consumers turn 40 years of age – a time when many consumers are near their peak earnings,” Ezra Becker, senior vice president and head of TransUnion’s global research and consulting group, said in prepared remarks.
Roughly 24 million consumers, or about 10 percent of American adults, were either very likely or somewhat likely to take out a personal loan, according to a 2016 Bankrate survey conducted by Princeton Survey Research Associates International of adults living in the U.S.
Nearly one-fifth of that 10 percent of respondents were 18 to 29 years old.
Personal loan growth has appeared in other age groups and financial institutions as well.
According to earlier TransUnion research, of the total 15.82 million consumers that had personal loans at the end of 2016 (the highest level since at least 2009) totaling $102 billion in volume, Baby Boomers and Gen X made up 32.8 percent and 31.6 percent of that space respectively, compared to Millennials at 26.6 percent.
Credit unions raked in 30 percent of those Millennials, compared to fintech at 26.3 percent and banks at 26.1 percent.
Marlborough-based Digital Federal Credit Union has seen increases in personal loans over the last three years.
The credit union issued more than $58.6 million in personal loans in 2015, nearly $72.8 million in loans 2016 and, as of August, $65.1 million – well on the way to surpassing 2016 levels.
“Every individual’s situation is unique and a personal loan could be a great way to pay for unplanned expenses including car repairs, consolidated high-interest credit card debt or other loans such as private student loans,” DCU consumer loan manager Megha Singh said. “We anticipate continued growth in this area.”
Growth Opportunity
Personal loan products made gains as Millennials shouldered more student debt and other forms of credit became harder to obtain.
Student debt, which exceeds $1 trillion nationwide, is contributing to a reduced homeownership rate for the Millennial generation compared to earlier generations. According to the TransUnion study, only 5.16 percent of Millennials took out mortgages in 2015, compared to over 9 percent of Gen X in 2001.
Reduced homeownership rates and the Great Recession’s impact on equity lending resulted in a growth opportunity.
“This created an opportunity for a product to fill the gap,” Malka said. “HELOCs had more stringent standards and personal loans got easier.”
Credit unions are well positioned to take advantage of this trend due to their strong relationship building, but fintech is poised to make the biggest move, according to PwC’s 2017 Global Fintech Report. In the survey of 1,308 financial services and fintech executives, 56 percent of respondents say customers are already obtaining personal loans via fintech companies.
The report also found that bankers think they are most at risk of losing their personal loan business to a fintech company, but Millennials don’t agree.
“Digitalization allows consumers of all ages to more easily ‘shop around’ … making the process less onerous,” Nidhi Verma, co-author of the study and vice president in TransUnion’s innovative solutions group, said in prepared remarks. “This is the market Millennials have grown up in, and the one in which they most naturally operate.”
