May 3, 2019

Many Lenders Are Turning Toward Consumer Loans -- Here's Why

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Consumer lending has seen growth over the past few months, with higher wages and continued low interest rates fueling spending. Banks and lenders have an opportunity to capitalize on this trend and strengthen their loan portfolios. 

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Consumer spending is up, and banks are looking more towards consumer lending to fill their loan portfolios.

Growth in consumer lending and credit cards sparked Q4 2018 profits for banks and lenders. More specifically, consumer loans jumped 5.3 percent or $13.9 billion over the past 12 months, with auto and recreational-vehicle loans leading the way.

Total consumer credit increased $17 billion in January 2019 from the previous month, with revolving debt outstanding rising at a faster pace.

Data collected over the past quarter points to more confident consumer spending, with an increase in loan activity driven largely by a more robust labor market and higher wages.

Further, the Federal Reserve's reluctance to raise interest rates is also boosting consumer loan activity. The Fed also shot down all projections of another rate hike for the remainder of the year. The central bank looks to be patient about increasing the rate any further over the short term.  

Consumer credit increased at an annual rate of 5.1 percent by the beginning of 2019, with a 2018 fourth-quarter pace of 6.2 percent, faster than the previous quarter.

Revolving credit outstanding - including credit card debt - increased $2.57 billion in January following gains of $939 million, while non-revolving debt outstanding - including student and car loans - increased $14.5 billion following a $14.4 billion increase.

More confidence in consumer spending is sparking higher credit card loans, opening up an opportunity for banks and lenders.

Capital One Financial in McLean, VA, reported a $1.2 billion profit in Q4 2018 thanks to improved credit health and growth in consumer loans. And BBVA Compass in Birmingham, AL, saw growth in consumer lending and credit cards drive fourth-quarter profits.

In addition to stronger consumer spending due to an extended low-interest rate environment and higher wages, traditional lenders are also making banking more convenient for consumers by taking a page out of fintech lenders' books.

Using digital technology and artificial intelligence (AI) to find clients, assess creditworthiness, and even manage loan portfolios, banks and lenders are better able to serve their client base, which includes consumers.

Further, banks and lenders are increasingly looking to unsecured consumer lending through fintech partnerships to lend to consumers digitally. In fact, the unsecured personal loan market in the US is growing at by 20 percent every year with more than $125 billion in balances. Further, TransUnion anticipates unsecured consumer personal loans to hit an all-time high of $156.3 billion by the time 2019 draws to a close.

In today's interest rate environment, banks and lenders are selling off long-duration assets and buying shorter-duration, higher-yielding consumer loan assets. So far this year, there's been a trend in banks increasingly selling billions of longer-duration mortgages and focusing on consumer loans.

But in order to ensure a robust loan portfolio, financial institutions are tasked with making room for only the highest-performing consumer loan assets. Garnet Capital has numerous bank-quality loan portfolios that banks can buy to replace underperforming loan assets on the books.

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