How non-prime risks are driving the growth in consumer credit, in 4 charts

Consumer credit performance is growing strong after the uncertainty caused by the pandemic, with record numbers of new credit cards entering the market in Q3 2021. 

Moreover, healthy credit trends in non-prime consumers are encouraging lenders to expand their offering to the subprime risk tier, according to a new credit report’s latest Credit Industry Insights Report. Lenders have become more comfortable with lending to subprime segments due to record low delinquency rates across most products.

The year-on-year growth in originations for both credit cards and personal loans was strong in the third quarter.  This was partly due to very low levels recorded in 2020, but they’re still at all time highs.

There was a great deal of uncertainty at the start of the pandemic, and many lenders opted to take a wait and see approach. Moreover, the jump in consumers in loan accommodation programs, and questions on how those consumers would perform once they exited those programs added to the uncertainty.

As a result, lending to below prime consumers was suppressed and financial institutions turned their focus to the prime areas of the market to help mitigate risk.

Credit cards and personal loans were some of the products that took the biggest hits in those early months of the pandemic – consumers just simply didn't need as much credit, as spending decreased. Another impacting factor was the influx of government stimulus in the form of transfer payments or enhanced unemployment benefits. 

“They’ve gotten very comfortable with the fact that consumers' credit standing didn’t collapse as unemployment jumped. Despite the uncertainty, consumers continued to perform very well on their credit, and that’s what gave the lenders confidence to get back into the market in a bigger way in 2021,” said Charlie Wise, senior vice president of research and consulting at TransUnion. 

All casual observers back in spring 2020 were expecting to see a huge surge in delinquencies. Many lenders had put in place forbearance programs, payment holidays that gave consumers some breathing room, but as soon as these expired, lenders were anticipating a rise in delinquencies, he added. 

But through the middle of 2021, delinquency rates on every product were at virtually all time lows.

“Consumers have performed extremely well on their credit throughout the pandemic. They were taking care of products such as auto and mortgage like they hadn't before, with the same dynamics in personal loans and credit cards,” Wise said.

Credit cards

The credit card market is experiencing a post-pandemic boom, with a record 20 million card originations in the third quarter of 2021 - up 63% from a year earlier, according to TransUnion.

Growth was observed across all risk tiers, but 45% of originations came from below prime consumers – the highest proportion of originations occurring in this segment of the market since 2010. This increase in origination volume helped drive the number of consumers with a credit card to a high of 196 million in Q4 2021, according to the study.

The non-prime segment of the market enjoyed higher access to credit compared to the more uncertain times caused by the pandemic in 2020 and early 2021.

Non-prime credit card originations totaled 9 million in Q3 2021, a 75% year-on-year growth. The non-prime risk range includes tiers that have a VantageScore of 300 to 660.  

Personal Loans

Outstanding balances aggregate across the entire industry on personal loans are higher than pre-pandemic - and in fact, higher than any point in history, according to TransUnion. 

Personal loans are generally much more focused on higher risk borrowers, as people with prime credit scores don’t get personal loans for the most part. Higher risk borrowers saw the biggest cutback in credit access during the pandemic, and now they are driving much of the demand for personal loans, Wise told Tearsheet.

Another issue that emerged during 2020 was that many fintechs, which are big players in this space, sourced their funding not from deposits, but from borrowing money from other institutional lenders. That credit access was cut back as well, so they were not able to issue nearly as many loans this past year, he added. 

Fintechs now represent one of the largest segments of personal loan originations in the industry, more than banks and credit unions. A lot of that growth has increased consumer access to credit - there’s a big unserved need for lending in this space. 

Another noticeable trend is that banks’ share of the unsecured personal loan market is decreasing - from 16% in Q3 2016 to 12% five years later. Credit unions are displaying similar patterns, down from 27% to 17% over the same period.

“Fintechs don't play in the deep subprime space to serve very risky borrowers, that's not their sweet spot. They also don't play at the high end of the market, the high prime consumers. It's that middle market - consumers with not terrible, but not great credit - that was largely underserved that drove a lot of this growth. They've really found a niche because these are hard consumers to lend to,” he said.