September 29, 2020

Online Consumer Loans Faring Better Than Expected

EXCERPT: Consumer loans are performing better than the general economic conditions would predict, which bodes well for high-quality consumer loan portfolios.

Consumers are spending less amid the coronavirus pandemic and are paying down their debt.

The online lending sphere has made considerable strides in the financial industry, filling a void that an increasing number of digitally-savvy consumers have been looking to fill. But there have been concerns over how the industry would fare during times of high unemployment.

The coronavirus pandemic has seemingly answered that question. While the economy has taken a massive hit as a result of the health crisis and millions of Americans have filed for unemployment benefits, credit quality has managed to stay afloat. In fact, it's done better than anticipated, as explained in a recent American Banker article.

Consumer Borrowers Faring Rather Well Despite the Crisis

Recent data from data firm dv01 has shown that the share of borrowers continuing to make timely loan payments rose in August, despite the expiration of unemployment benefits from the government. Online consumer loan performance has been maintained.

There was, however, a blip on the radar when the pandemic first hit. The percentage of online borrowers failing to make timely payments soared to 16.5 percent in May, up from 5 to 6 percent prior to the pandemic. But by August, the number dropped down to 8.9 percent, although there were still accounts in hardship deferment.

While credit performance for online loans could still worsen over the coming weeks - especially if unemployment remains high - consumers seem to be doing much better than expected. Rather than borrowing to keep up with large expenditures, consumers are actually deleveraging to mitigate against risk.

When the online lending industry started to take off years ago, there was some speculation that lenders would not fare well in the midst of an economic downturn. But we've been seeing a significant decline in consumer spending and fewer loans being taken out to support big purchases. And with less spending comes fewer required credit card and loan payments.

LendingClub's loans on hardship plans may have reached 12 percent in May, but they dipped to under 5 percent by July.

Less Spending and More Saving Among Consumers

Consumer saving has been rampant over recent weeks, with the personal savings rate currently over 15 percent for the first time in decades.

Perhaps consumers are more fearful of overspending as they deal with the economic debacle caused by the coronavirus pandemic. In turn, Americans are pinching their pennies while paying down existing debt. The share of online loan balances being paid off early has increased since before the pandemic. Borrowers may be applying for installment loans to refinance high-rate credit card debt at a lower interest rate.

Perhaps the fallout of the 2008 economic crisis may have impacted how consumers behave in the midst of financial uncertainty. For many, their property values and incomes have never fully recovered.

But this time around, consumers have gone into the current recession with stronger balance sheets compared to the last crisis. While loans on hardship plans with LendingClub peaked at 12 percent in May, they dropped to less than 5 percent two months later.

Loan issuance in the online lending industry increased by 21 percent from June to July, though that number is still far from the 56 percent drop from the same time last year.

Lenders May Want to Consider Adding Consumer Loans to the Books

Given how well consumer borrowers have been holding up throughout the pandemic, this is good news for lenders with high-quality consumer loans on the books. Lenders may want to increase their share of such loans by acquiring assets that will help strengthen and diversify their loan portfolios.

Garnet Capital has plenty of robust consumer loan portfolios available and can help lenders facilitate the required transactions.

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