Strong economy supports rising consumer credit

Four main categories of consumer credit were showing overall positive growth and performance through the end of 2017, according to TransUnion, though trends were detected within each credit type.

For example, “consumers are staying in their cars a bit longer,” notes Matt Komos, vice-president of research and consulting. Komos says the longer retention of vehicles in part arises because loans can run longer than ever—as far as 84 months.

The number of auto loans increased 4.7% from yearend 2016 to the end of 2017. Growth in auto loan balances finished the year up 5.5% year over year. TransUnion says that is the lowest growth rate for balances since 2011’s 5.3%. Originations fell for the fifth straight quarter, by 4.8% in the third quarter of 2017.

“Auto lending is stabilizing after years of rapid growth,” according to Brian Landau, senior vice-president and automotive business leader. He adds that lenders have continued to tighten underwriting in the prime category and below.

This information comes the same week as other findings regarding auto credit. New information released by Equifax indicates that banks have reduced their market share of auto loan originations from 39.2% in the fourth quarter of 2016 to 33.9% in the fourth quarter of 2017.

In addition, Auriemma Consulting Group reports that delinquencies—defined as at least one payment past due—for subprime auto loans extended by automakers’ captive finance companies rose to 7.8% in the third quarter of 2017, the highest level since 2010. The firm notes that many captive lenders have already pulled back on subprime lending, seeing the trend.

Overall consumer credit trend

Going back to the overall picture, nationwide, 20.3 million more credit accounts were started in 2017, in auto, credit card, mortgage, and unsecured personal loan categories. The company believes this reflects continuing strong employment and improving customer optimism.

Average debt per borrower grew across the board through yearend, compared to 2016. By category, average mortgage debt rose $7,321; personal loan debt, $443; auto debt, $206; and credit card debt, $158. In all but one category, serious delinquency rates dropped slightly. In the credit card area the delinquency rate increased a bit, by 8 basis points.

“Consumers continue to gain access to more credit, and balances are generally rising at a healthy clip,” says Komos. “For the most part, consumers are paying their debts in a timely fashion, which has been especially evident for mortgages and personal loans. This is likely a result of the strong economy, which has helped consumers manage their personal balance sheets and build confidence.”

Credit cards

As noted, credit card lending was the only category to show an overall increase in delinquencies for the year. Serious delinquencies—90-plus days for cards—rose to 1.87%, versus 1.79% in 2016.

Paul Siegfried, senior vice-president and credit card business leader, reports that the number of consumers with access to credit card accounts remains at an all-time high: 418.6 million, versus 364.2 million at the end of 2014, a rise of almost 15%. However, lenders have been tightening underwriting and originations were down 6.8% in the third quarter (16.3 million) versus the third quarter of 2016 (17.5 million). (TransUnion reports originations on cards one quarter in arrears to account for reporting lags.)

Siegfried says the underwriting pullback “is likely a response—and not a surprising one—to the increased ratio of below-prime consumers issued card credit in recent years and the associated uptick in credit card delinquencies.”

An interesting breakout in TransUnion data looks at generational payments performance: Gen Z cardholders had a delinquency rate of 2.69%; Millennials, 2.77%; Gen Xers, 2.35%; Baby Boomers, 1.21%; and Silent Generationers, 0.78%. (All rates were up.) All groups also saw their average balances rise, from Gen Z’s 26.5% annual rate to the Silents’ 0.2%.

Mortgages

“Mortgage delinquency rates for the fourth quarter of 2017 continued to decline, reaching their lowest level since the recession,” says TransUnion’s Joe Mellman. The rate—60 days or more past due— fell to 1.86% in the final quarter of 2014 versus 2.28% in the fourth quarter of 2016.

“This largely reflects recession-era defaults having worked their way out of the system and recent originations being underwritten to a very high standard,” says Mellman. He is senior vice-president and mortgage business leader at TransUnion.

The company found that average mortgage debt came to $201,736 by yearend, more than $7,000 above 2016. Yet new mortgage balances declined in the third quarter of 2017 versus the year earlier period, by 3%, to $228,563. New mortgage balances had been rising quarter to quarter since the third quarter of 2014.

A contradiction? Mellman suggests otherwise.

“There could be multiple factors contributing to this,” he says. One is that this could include cash-out refinancing, which would increase the average mortgage debt. Another potential reason is that the drop in refinancing share could be lowering average new account balances, he explains, because average refi size can be larger than average purchase size.

An open question right now is where home equity credit is headed. Komos notes that equity credit originations had been slowing down—nearly flat. A good deal of equity is now available, because of rising home prices. So, Komos says, the potential for growth is there. However, the impact of the new tax law on equity credit is still being parsed by lenders and consumers alike.

Unsecured personal loans

This has been a major growth area for consumer credit. TransUnion indicates that the year closed with 18.2 million unsecured personal loans outstanding—a 40% rise over yearend 2014.

This trend in part reflects the activity of marketplace lenders. New Comptroller of the Currency Joseph Otting told the press late last year that he wants bank lenders to devise products to compete with fintech consumer lenders.

“As traditional lenders return to or enter this market,” says Jason Laky, senior vice-president and consumer lending business leader, “we expect the number of personal loans will continue to rise.”

In terms of credit performance, serious delinquency rates fell to 3.29%, versus 3.83% at the end of 2016. Average debt per borrower rose to $8,083 at yearend, up about $443 from 2016.

“The last quarter of the year is traditionally the one where delinquencies rise the most,” says Laky. “In 2017, the increase in delinquency was muted, leading to the lowest fourth quarter personal loan delinquency rate that we’ve observed since the end of the recession. This strong performance bodes well for 2018.”