Finding opportunity in the personal loan space

While the pandemic may have shifted consumer borrowing habits, knowing how to reach consumers can have a positive bottom-line impact.

Personal loans have exploded in popularity, with balances tripling over the past 10 years to become the fastest-growing segment of the consumer debt market.  And there is tremendous opportunity in this space for banks and credit unions to grow their share of the market.

The rise of personal loans started in mid-2019, driven by historically low unemployment and a steady economy, which boosted consumer confidence. In addition, the fintech industry is well-capitalized, giving it the ability to lend more money to consumers. There has also been a surge in online lenders that market loan products as a low-cost alternative to credit cards, and peer-to-peer lending has opened the door to allow everyday investors to participate in the personal loan space.

Personal loans represent about 1% of outstanding consumer debt, so there’s still plenty of opportunity for traditional financial institutions to participate in the growing personal lending space. For financial institutions that know how to reach consumers, personal lending products can have a positive bottom-line impact.

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Use consumer data to create a profile of low-credit-risk borrowers who may be good candidates for a personal loan to help fund specific needs. Financial institutions should understand the profile of the personal loan borrower has shifted due to the rise of fintech lending. Though personal loans were traditionally marketed toward subprime borrowers, above-prime borrowers hold around 40% of outstanding personal loans.

Financial institutions should not view personal loans as merely a more convenient loan alternative for emergency projects, but rather as an opportunity to help consumers with good credit identify a path away from high-interest credit card debt. More than 65% of borrowers take out a personal loan to consolidate debt or refinance credit cards.

It’s important for financial institutions to provide an easy and convenient customer experience, both in-branch and digitally. This includes making sure all representatives are knowledgeable about the types of secured and unsecured lending products offered. Automated underwriting can deliver a decision instantly, making the loan application process easier for consumers.

Make personal loans personal

Financial institutions should make good use of data to identify consumers most likely to use a personal loan for a specific reason and personalize their marketing activities to speak to that need. Examples of such needs include auto financing, medical bills, moving/relocation expenses, business financing and wedding expenses, according to LendingTree.

Here are a few real-life stories from consumers about how they used their personal loans:

“When relocating across the country, I opted to use a personal loan to pay moving expenses. It was much less expensive than using a credit card.” Michael, Washington

“We used a personal loan to consolidate credit card debt accrued while my spouse was in medical school.” Dave, Georgia

“My home’s 25-year-old HVAC system died unexpectedly, and I felt more comfortable taking out a personal loan to pay for the replacement over time, leaving my savings intact for an emergency.” Natalie, North Carolina

“I bought my first home and wanted to make a few changes that would turn it into my absolute dream home. After researching the costs, I decided that a personal loan was the best way to cover expenses up front.” Tiffany, Florida

When lenders tightened underwriting guidelines in late March 2020, personal-loan growth slowed to its slowest rate since 2012, a likely result of COVID-related pullback, particularly in below-prime tiers.

According to Vericast’s TrendWatch survey, 27% of respondents saw an increase in consumer loans since COVID-19 (excluding Paycheck Protection Program loans). In addition, 16% of Americans affected by COVID-19 plan to apply for personal loans to help pay bills and loans.

The outlook for personal loans remains strong, and banks and credit unions are well-positioned to serve the growing consumer demand for personal loans because they have the ability, processes, name recognition and customer loyalty to do so.

Stephenie Williams is vice president, financial services marketing product and strategy at Vericast.

Learn more about where lending opportunities lie in the BAI Executive Report “Where banks fit in the new world of lending,”