From vacation spending and major purchases to emergency expenses and debt consolidation, consumers in recent years have turned to personal loans for their cash needs.  

Balances in unsecured personal loans reached a record $156 billion in the U.S. during the third quarter of 2019, according to TransUnion, a consumer credit reporting agency. This represented a year-over-year increase of 17.8 percent.  

Part of the growth is driven by financial technology firms, like Lending Club, that have transformed how quickly and easily consumers can apply for and receive funds. The popularity of these loans has also presented opportunities for banks and credit unions that have long operated in this market.  

“How a member gets a personal loan has evolved with technology,” said Caleb Cook, vice president of consumer lending at Digital Federal Credit Union, which has branches in Hudson, Manchester, Merrimack and Nashua. “But it’s still more or less the same basic term loan we have offered for decades.”  

 Alternative Financing  

One reason consumers have turned to unsecured personal loans – cash loans that are not for business purposes and not backed by collateral – is debt consolidation. With lower interest rates compared to credit cards, these loans are often used to pay off credit card debt.   

U.S. consumers had 22.5 million of these loans in the third quarter, with an average balance of about $9,000, according to TransUnion. The loans include 4.8 million originations in the second quarter, an 8.2 percent increase from the same time period last year. (Because of a reporting lag, originations trail TransUnion’s other data by a quarter.) Between the second quarter of 2017 and 2018, loan originations had jumped by 23 percent.  

Originations increased even more in the area. The metropolitan statistical area that includes much of eastern Massachusetts and southern New Hampshire had about 27,600 loan originations in the second quarter, according to TransUnion, a 30.6 percent increase from the same time period last year.  

Loan balances in the region rose from $1.614 billion in the third quarter last year to about $2.1 billion this year. Two years ago, balances were $1.337 billion.  

TransUnion Senior Vice President and consumer lending business leader Liz Pagel said fintechs were able to enter and succeed in the marketplace because they recognized consumers needed access to this type of financing. TransUnion data shows that fintechs accounted for 38 percent of all unsecured personal loan balances nationwide by the end of 2018, up from 5 percent in 2013.  

“[Fintechs] found a pocket of demand that wasn’t being met,” Pagel said. “Because they were able to create a new consumer experience with online application and fast approval … it makes sense that it was so successful.”  

While much of the popularity is attributed to fintechs, Pagel said the product continues to grow at traditional finance companies, banks and credit unions. For the most part, consumers have effectively managed the debt, with the U.S. borrower-level delinquency rate declining from 3.41 percent in the second quarter to 3.28 percent in the third quarter. Other studies have shown that these loans help borrowers manage their credit scores as well, Pagel said.   

 Product Awareness  

Cook, with Massachusetts-based Digital Federal Credit Union, has seen the popularity of personal loans grow in recent years. Fintechs helped raise awareness among consumers about these loans and made them more accessible, he told The Registry Reveiw in an email. DCU members have benefited from advanced technology when applying for loans, giving them an affordable and manageable option for financing, he said.  

The loans are also attractive on the secondary market.   

“Improved access, favorable market conditions, and increased competition have helped keep rates low from a historical perspective,” Cook said.   

Overextension could be a concern, he added, with consumers able to qualify for larger amounts at varying rates and terms from multiple lenders. But those risks can be managed.  

“Prudent, recession-tested lending practices help in managing the associated risks, making personal loans an attractive asset to help balance and diversify a loan portfolio in an age of lower yielding assets,” Cook said.  

Alternative Information  

DCU uses the traditional credit score when underwriting these loans, as well as trended data that takes a longer look at a borrower’s credit history. For some lenders, alternative information like trended data has played a bigger role in both underwriting and prescreening borrowers, potentially leading to more growth with this product.  

In a recent survey of 18 U.S. lenders by Aite Group, a Boston-based consulting firm, 72 percent reported using alternative data when underwriting or marketing the loans. Senior Aite Group analyst Leslie Parrish, author of a report on the survey results, said alternative information helps lenders, especially fintechs, verify the borrower’s identity and determine creditworthiness for those who might have insufficient traditional data.  

“[Lenders] are having to look beyond a traditional credit file to see how they’re managing their other financial obligations, whether they’re on an upswing or downswing financially,” Parrish said.  

While the data helps lenders build their customer base and compete in the marketplace, some lenders have expressed concerns about potential biases in the tools used to analyze data and difficulties explaining the results. Parrish expects the tools to improve in the coming years, leading more lenders to adopt alternative data.