Banks were already under pressure on interest rates on personal loans from companies such as SoFi and Marcus, and new data reveals that credit unions are also taking a bigger slice of that pie.
Credit union loan balances rose 2.3% in May and unsecured personal loans led the way with monthly growth of 3%, according to a report by CUNA Mutual Group, an insurance and financial services which oversees the credit union industry, published this month.
“Many members of credit unions go into debt before interest rates are rising further away [to combat inflation] and consolidate other loans. We expect this trend to continue over the next six months before slowing in 2023 when interest rates peak,” said Steve Rick, chief economist for CUNA Mutual Group.
Unsecured lending grew 13% in the first six months of 2022, compared to 0% annual growth in the first six months of 2021, Rick said.
One of the credit unions seeing the most applications for unsecured loans is the North Country Federal Credit Union in South Burlington, Vermont.
Personal loans are up 7.2% year-to-date for the $908 million credit union, according to CEO Bob Morgan. But the increase may not be entirely due to new borrowers coming through the doors.
“I think the reason consumer lending is growing faster in 2022 is due to fewer mortgage refinance repayments rather than an increase in issuance,” Morgan said. “This leads to slower portfolio turnover and a faster growth rate.”
Morgan said personal loans are a “highly competitive” market between banks, other credit unions and fintechs. “Players like SoFi and Marcus have as much or more influence than credit unions on rates,” he said.
Banks that are active in this space are seeing the effect of new entrants. Stephen Varckette, president and chief executive of Andover Bank in Andover, Ohio, said personal lending activity continued at a “pretty normal” pace for the bank with $581 million in assets due increased competition.
“There are a ton of non-traditional options for consumers these days,” Varckette said. “I guess they are gaining popularity.”
A combination of factors — the elimination of federal COVID-19 assistance, rising costs of basic needs, and shrinking disposable income — is forcing more consumers to seek out personal loans to make ends meet.
But these borrowers are scrambling to find the best deals as rates continue to rise.
The average personal loan interest rate fell from 10.41% in early May 2022 to 10.60% by July 20, 2022, according to Bankrate.com. Personal loan interest rates should continue to rise if the Fed raises the prime rate again at its next meeting, the company said.
When interest rate on deposits are well below inflation, there is little incentive to save. In fact, buying something today can be cheaper than borrowing money, said Tim Scholten, founder and president of credit union and community banking consultancy Visible Progress.
So why would this lead to more unsecured debt?
An alternative would be to refinance a mortgage to take out equity, but that’s less attractive now due to rising rates – making unsecured debt the next best option, Scholten said.
“Rather than increasing the interest on their entire mortgage, it’s more cost-effective to take out a higher-rate unsecured loan,” Scholten said. “If I know things are going to cost 10% more next year than they do now, it makes sense to buy now with borrowed money and pay it back with inflated dollars.”
Inflation really kicked into high gear in 2022, but wages haven’t adjusted much yet. At the same time, property values have jumped dramatically, and property tax increases are putting more pressure on wages, Scholten said.
As a result, many consumers need more cash at the end of their month and use the debt to solve the problem.
“I expect this trend to continue as long as banks and credit unions continue to offer unsecured loans at reasonable rates,” Scholten said. “Inflation gives consumers a lot of incentive to spend and little incentive to save under current conditions.”
Vincent Hui, managing director of Cornerstone Advisors, said the company had noted an increase in the use of credit cards – an alternative to taking out more loans – but far from the level recently reached by secured loans such as l auto and mortgage.
“Inflation is a factor because it decreases discretionary spending and people need to tap into credit,” Hui said. “Anyway, global loans will likely slow as interest rates rise, making monthly payments less affordable for people.”
Scholten said the popularity of buy now/pay later loans are undoubtedly impacting the personal loan space for credit unions and banks, although he said exactly how difficult it is to assess.
“I think BNPL’s growth is an indicator of the current consumer mindset,” Scholten said.