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Will personal loans eclipse Americans’ credit card use?

Find out how experts think the booming personal loan market might affect the credit card industry


It’s easier than ever to get a personal loan, thanks to the many fintech companies offering convenient services. Will the personal loan market explosion turn consumers away from using their credit cards? Read what experts think.

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The unsecured personal loan market is at an all-time high, thanks in large part to the fintech industry providing consumers with convenient and readily available services.

In fact, TransUnion data show the personal loan market rose by 18 percent from 2017 to 2018, its balances reaching a staggering figure of $138 billion.

Will the rise in personal loans affect the credit card industry? Find out what experts predict now.

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About personal loans

Unsecured personal loans do not require collateral.

And they are easier to get than ever because fintech firms such as Avant, GreenSky, SoFi and Lending Club offer borrowers digital or mobile options that don’t rely solely on FICO scores for determining creditworthiness.

But in 2018, these types of loans typically went to the subprime tier of borrowers — those with credit scores from 550 to 620 — which represented the fastest growth in the market at 4.3 percent year over year, according to TransUnion.

And this group is made up of consumers who, if the economy slows, are most likely to experience financial stress.

But a May 2019 study from TransUnion found that sometimes “both lenders and consumers can benefit when additional loans are extended to customers during difficult times.”

This might sound contrary to what lending is all about, but the study found these borrowers often can use that extra liquidity to get through a short-term financial crisis.

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Personal loan purchases vs. credit card purchases

Jaquetta Turner, owner of the website Young and Finance, doesn’t feel the booming personal loan market will affect the credit card industry at all.

“Although the personal loan market has reached an all-time high, I don’t believe it will have any impact on the credit card industry,” Turner said. “Most individuals who take out personal loans are using the funds for purchases you typically can’t make with credit cards, such as cars, real estate, rent payments or debt consolidation.”

Spending is shifting

Taylor Kovar, CEO at Kovar Capital, doesn’t think the rise of personal loans will drastically affect consumers’ use of credit cards, but he has noticed some shifts in consumer spending.

Large purchase spending is shifting away from credit cards and toward these fintech-enabled personal loans, he said.

“I have met several people who have chosen to take out a personal loan when doing small real estate flips or to cover large medical expenses instead of carrying those expenses on a credit card,” Kovar said.

Erik Skjodt, co-founder and CEO of personal finance app Medean, agreed with Kovar.

More and more consumers see value in obtaining a personal loan for large, one-off purchases because they can often get a lower interest rate on one than with a credit card, Skjodt said.

And access to personal loans has grown mainly due to fintech’s ability to use alternative data and credit measures to better assess risk, he added.

“The fastest-growing segment for personal loans comes from consumers who would be considered subprime by traditional FICO scores, and all of this seems to be positive for consumers, as it has increased credit access without seeing any increases in delinquencies (yet),” Skjodt noted.

Enter the Apple Card

The Apple Card could change the credit card market because of the way it seamlessly weaves multiple mobile financial services into one, easy-to-use app, said Greg Mahnken, credit industry analyst at Credit Card Insider.

“Apple is known for changing the course of the various industries it pioneers innovation in, so it is definitely something to keep an eye on,” Mahnken said.

And because personal loans are now so effortlessly accessible, it’s possible other credit cards will follow in the footsteps of the Apple Card by providing next-level technologies that demand the spotlight and offer more appeal than an easy-to-get loan, he added.

For example, the Apple Card integrates many features that stand-alone apps such as Mint can be used for, but simplifies things by combining it into the Wallet App.

The spending breakdown categorizes everything you purchase by color and shows the percentages in your spend summaries, making it easier than ever to see how you are spending your money without the need to download a separate app.

“Other areas where the credit card industry may evolve further — due to both the competition spurred by easy loan access and the Apple Card’s trendsetting technology — are simplicity and fast access to credit,” Mahnken said.

Not all banks and issuers allow borrowers to use credit immediately, but the Apple Card gives you more immediate access to your card once you’re approved.

Other mobile apps that provide similar integration involve more steps to be able to actually use the credit, such as getting the physical card in the mail and having to activate it on the app and at an ATM before being able to make purchases.

“Even the rewards earned by using the Apple Card are made available to cardholders the same day with their Daily Cash back feature, which could affect the credit card rewards landscape as well,” Mahnken said.

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Interest rates factor in

Jordan Bishop — founder of the website Yore Oyster — feels the strong personal loan market will have a huge impact on the credit card industry.

But only for some card users.

Many of us like to use credit cards because they’re a convenient way to transact and they offer us generous rewards on our purchases, Bishop said.

But there is a smaller subset of the market who uses credit cards more like a personal loan: They buy something today and wait months or years before paying it off, he added.

“Since most credit cards charge annual interest rates of 17 percent to 30 percent, I expect to see these consumers moving to fintech loan providers, which can offer them loans at much lower interest rates,” Bishop said.

And Todd Christensen, education manager at Money Fit by DRS — a nonprofit debt relief agency — agrees.

The advantage personal loans have over credit cards for the consumer is a set monthly payment with a set end date to the debt, Christensen pointed out.

“From a consumer behavioral perspective, borrowers have an easier time making monthly payments and paying off the debt if there is a set monthly amount of the debt and a set pay off date,” Christensen said.

But Christensen is not a fan of financing consumer purchases.

“In my book, potentially beneficial loans are still limited to home mortgages, reasonable government-guaranteed student loans and possibly a business loan,” he mentioned.

See related:  Personal loans surge into mainstream

Rising delinquencies might tighten the spread between personal loans and credit cards

James Garvey, CEO of the website Self Lender, said that before personal loans, refinancing credit card debt typically involved finding a new credit card and then transferring the existing debt onto the new card.

“For the last decade, consumers have been using personal loans as an escape valve to refinance credit card debt,” Garvey said.

He feels that as delinquencies rise in the installment loan and credit card industries, the spreads between personal loans and credit cards will inevitably tighten.

In other words, today consumers are benefitting from the widespread availability of inexpensive installment loans.

“However, rising delinquencies in both installment loans and credit card markets will force lenders to recalibrate their models and increase interest rates for both products,” Garvey said.

Crunch the numbers

There are pros and cons to using both personal loans and credit cards for big-ticket purchases.

The most important thing for consumers to do before they decide how to buy an expensive item is to crunch the numbers.

Look at the overall cost — and convenience — of using a personal loan instead of a credit card and choose the one that makes the most sense for your situation.

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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