Personal Loan Benefit to Consumers
Paying off credit card debt is the most common purpose for taking unsecured personal loans. A few consumer benefits of doing so include big savings in interest cost over the life of the loan and the consequent possibility of improved credit scores that makes the consumer eligible for even lower interest rates.
Benefit to Lenders
For personal loan lenders, there are benefits too. Debt Consolidation as a purpose has relatively lower credit risk as compared to other credit purposes. And if the consumer is a homeowner, the likelihood of defaults is even lower (relative to renters). Most importantly, personal loans for the purpose of credit-card debt consolidation is a very scalable business for lenders. Approximately $465 Billion worth of revolving credit card debt is considered to be ‘refinance-able’. Using credit bureau data makes this population quite easily accessible through the direct mail acquisition marketing channel.
Acceleration in Direct Mail Acquisition Marketing
The explosive growth witnessed in this product-channel (personal loans for debt consolidation via direct mail) category can be best represented through the amount of direct mail marketing specifically targeted to this group using credit bureau data.
Source: CompereMedia
Mintel’s Comperemedia (a service that tracks direct mail advertising across industries) recently published a report that shows direct mail volume, in the first half of 2017 for Lending products, has for the first time (up 7% year on year) surpassed credit card direct mail volume, which has been on the decline (down 22% year on year). In its classification, while ‘Lending’ includes both secured (mortgages) and unsecured personal loans, the latter represents over 50% of the ‘Lending’ mail volume and is the fastest growing sub-sector within ‘Lending’ products. In May 2017 alone, Comperemedia estimates that over 250 million mail offers were sent out by Personal Loans companies, this compares to 150 million mailers in May 2016.
It seems, within the direct mail channel, personal loans acquisition marketing (thanks to the boom in the unsecured loans fin-tech sector) is gradually catching-up with credit cards acquisition marketing, especially in 2017, in a rather ‘cannibalistic’ way?
Targeted Credit Profile
Interestingly, there have been recent reports of credit card companies witnessing an uptick in charge-offs rates (percentage of defaults relative to outstanding receivables). In the past, such a trend has often been cited as a leading indicator of a larger economic malaise.
In this context, what is the typical credit profile of consumers who are being targeted to refinance their revolving credit card debt by such ‘personal loans-debt consolidation’ lenders?
Using loan level data in the public domain (source: Lending Club website), and running a regression of the top credit attributes (independent variables) that drive the interest rate charged on personal loans (dependent variable) reveals the following customer profile, that receives the most favorable interest rates for personal loans:
- ‘Debt consolidation’ loan purpose (‘Credit Card Debt Consolidation’ gets the lowest rate)
- Credit score above 720
- Low Debt to Income ratios
- Very few credit inquiries in last 12 months
- Homeowners get a better deal than renters (ceteris paribus)
- Loan amounts under 25,000
- Among other aspects
Moreover, past trends published by marketplace lending research companies show that average rates charged by marketplace lenders have been on the decline, which could also mean that more consumers (with credit card debt) with the above profile are taking on personal loans?
Also, as mentioned in an earlier blog post, debt consolidation personal loans at higher interest rates are really not ‘debt consolidation’ but ‘stacker’ loans, and these consumers should consider debt settlement opportunities instead of refinancing their existing debt.
Card portfolio left with ‘bad guys’?
If this is the profile of consumers being targeted/ solicited for lower rate refinancing by personal loan companies, what are credit card companies being left with in their portfolios? Is this consumer debt refinancing activity partly contributing to the increase in charge-off rates (worsening of ‘bad to good’ ratios) for credit card companies?
Maybe, there is an opportunity for credit card companies to accelerate the growth of their personal loans portfolios? Alternatively, credit card companies may want to consider lowering interest rates to compete with Personal Loan offers?
Total Credit Card Outstanding debt (Revolving Consumer Credit) is estimated at ~ $1 Trillion in Q1, 2017 and has historically been growing at the rate of 3-5% per year. $465 Million of this amount is being targeted by personal loan companies for refinancing. New personal loans (issued by both banks and non-banks) are annually refinancing $15 – $20 billion of ‘good credit’ card receivables, and growing.
Is it really a downturn in the economy or is the credit card industry beginning to show signs of a systemic and imminent ‘adverse selection’?
Disclaimer: The views and opinions expressed in this article are solely those of the author. Examples of analysis performed within this article are only examples. They should not be utilized in real-world analytic products as they are based only on very limited and dated open source information.
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