We have asked if auto lending is headed down the same path as mortgage lending in a previous analysis. That spurred a talk with Jason Laky, senior vice president and business leader for consumer lending and auto finance at TransUnion, about delinquency trends.
“We expect a modest increase in delinquency for auto and unsecured loans,” Laky said, “We expect mortgage to continue to decrease in delinquency because it is still working off the recession bubble.”
Laky also said a couple of drivers are related to this: the emergence of FinTech, and the reintroduction of the unsecured personal loan for the prime consumer. In recession, a lot of consumers chose not to take personal loans, and it was concentrated in sub-prime and non-prime.
2013-15 saw a fast growth of FinTechs and reintroduced the unsecured products to prime borrowers, particularly younger millennials with online savvy. This created a new channel and level of interest, spurring a large growth in the volume of loans. There was a shift from sub-prime to prime and overall delinquencies therefore came down from 2009.
Prime consumers take larger loans than sub-prime, so this shifts the overall average indebtedness and the personal loan debt continues to grow for borrowers who have these loans. “There’s no view in the APR of loans like these since it is not reported, and fees are included in the loan balance. So you can’t back into it using loan parameters like an auto loan,” Laky said.
When asked why the trend has turned around, Laky said there are very small basis points increases in delinquencies. Because of the maturity of the industry, it was driven in Q2 from pull-back from investors. FinTech lenders focused on profitability, so older ones mature, and they are showing up. It’s pretty modest and is almost within expectation and margin of error.
The default rates look back to Q4 2009, the tail end of the recession, and it was at 4.98 percent coming out of the recession. So there is quite a lot of space still, in Laky’s view. “The longer we get into the credit cycle, the more important it is to look at consumer overall indebtedness,” he said, “Early on in the cycle, lenders are not participating as fully so you can make great individual products. The longer you get in the cycle, the more likely consumers are getting mortgages, auto loans, personal loans, etc. It’s important to keep an eye on the indebtedness of the consumer. We don’t do full consumer indebtedness, but for each category, the average debt per borrower has been increasing since before 2012. It adds up, and it is worth keeping an eye on as a lender.”
When asked if we can predict the next credit cycle using indebtedness, Lasky said, “It’s hard to predict the credit cycle, and particularly challenging now because the economy is doing well. If you look at macro factors, GDP is growing okay, 2-3 percent for the next year. Employment is doing well with 100,000 to 200,ooo new jobs. Wages have seen two percent growth. For the consumer, things are okay. It’s hard to see a credit cycle taking a major turn where consumers’ economic health is good. What we may see is a category by category reassessment of lenders about which segments they want to play in in a rising interest rate environment.”
When TransUnion built their model, a 50 bps increase was projected. If the interest rate increases more, that’s a sign the economy is doing better than expected. So an interest rate increase is not a bad thing, but it slightly affects funding costs for every lender in unique ways. When a rate increase affects the cost of funds, then pricing models need to be examined so competitive segments can be prioritized. Some lenders may drop some products as a result.
There has been renewed interest by bank and credit unions in unsecured personal loans because FinTechs have been successful. Banks have a huge advantage because funding can be from deposits. With the entrance of banks and a possible increase in the interest rate, FinTechs and traditional finance companies will have to think hard about what to participate in and how to get compensated for the risk.
According to Jason Laky, FinTechs have been really good at embracing data and analytics to think about how and where to lend. That will pay off in terms of having staying power as the credit cycle matures. Should we worry based on delinquency trends and data? It depends on how well we analyze what’s happening, he said.
Graphs in this article can also be viewed on TransUnion’s website.