Decade in Debt: How Personal Loans Grew, Evolved in the 2010s
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Personal loans have grown over the past decade from a niche form of consumer financing to an industry comprised of dozens of lenders originating around 5 million loans to new and returning borrowers each quarter. Outstanding balances have grown to nearly $160 billion, and approximately 20 million consumers now have at least one personal loan.
In this analysis, LendingTree reviewed the following factors: the annual growth rate of personal loans, offers by credit band and how consumers use this type of loan. The data shows how personal loans have evolved in the past 10 years, and helps us predict where the industry is headed.
- Key findings
- Personal loans expand by volume and market share
- Consumers still primarily borrow to refinance existing loans
- Personal loan terms vary widely based on lender and borrower credit
- Where personal loans are headed
- Personal loans grew at an average 8.7% annual rate from 2009 to 2019, and at an average annual rate of 21.6% from 2013 to 2019. This shows that in the years following the recession, personal loans grew exponentially. However, recent TransUnion data shows that growth rates steadied to more sustainable levels in 2019, a sign that the young industry may be maturing.
- Combined, most borrowers (67%) use personal loans to refinance or consolidate existing debt. You can use a personal loan to pay for virtually anything, but the majority of borrowers use personal loans as a debt consolidation tool.
- Prime borrowers have a bigger share of outstanding personal loan balances. Two-thirds of outstanding personal loan balances belong to prime borrowers with 660+ credit scores. Subprime borrowers get less favorable terms ー higher APRs and lower loan limits.
- Personal loans have grown and evolved as a product in the past decade. If lenders want to compete in the personal loan space, they’ll have to utilize technology to give consumers better access to capital.
Personal loans expand by volume and market share
Personal loan balances have grown at an average 8.7% annual rate since 2009. However, that includes the years of declining balances in the aftermath of the Great Recession and tightening lending standards for all types of borrowing. Measured from 2013, personal loans are growing at a staggering 21.6% annual rate, greater than any other type of consumer debt over the same period, including student debt.
Similarly, the number of consumers taking personal loans is also growing, nearly doubling in size since 2010 to approximately 20 million borrowers. That’s 10% of all American consumers with a credit file.
Consumers still primarily borrow to refinance existing loans
A decade ago, in the aftermath of the Great Recession, peer-to-peer lenders lenders like LendingClub and Prosper began marketing the idea of using personal loans to consolidate and refinance credit card debt. In 2010, 59% of consumers who borrowed through LendingClub indicated they were using loans to either consolidate existing debts or to pay credit card debt.
Today, that’s still the primary reason: a combined 67% of borrowers who received a personal loan using LendingTree indicated they took out the loan to refinance or consolidate existing debt.
In addition, the average loan amounts have risen. In 2010, the average personal loan amount borrowed through LendingClub was $10,822 ー $12,688 in today’s dollars. As of Q3 2019, the average loan amount through LendingClub was $16,381.
Personal loan terms vary widely based on lender and borrower credit
Prime borrowers have always held a bigger share of outstanding personal loan balances. Since 2010, prime borrowers and above (those with a credit score of 661 and above, based on the VantageScore scale) represented around 60% of the balances outstanding. But as we open a new decade, that number is rising: Two-thirds of personal loans outstanding belong to prime borrowers and above.
The most recent LendingTree snapshot from 2019 shows that most subprime borrowers won’t get a favorable interest rate. The combination of high APR and minimum loan amounts means that borrowers with credit scores below 660 are largely closed off from the personal loan market.
To put this into perspective, a subprime borrower who is approved for a five-year personal loan that’s worth $9,095 with 26.15% APR would end up paying $16,387.01 over the life of the loan. A borrower with a credit score of 720 or higher would pay $10,968.45 for the same loan, paying an average 7.63% APR. With high APRs (and therefore costly loans), there’s no wonder why personal loans are less attractive to subprime borrowers.
Borrowers within the same credit band see variance in APR, too
Your credit score is one factor in what kind of loan offer you’ll get. APRs are also determined by the length of the loan, your debt-to-income ratio and the lender that offers you a loan, among other factors. LendingTree has found that the average rate variance between the highest and lowest APRs offered to borrowers with credit scores between 680 and 719 is 9%, with an average difference in interest of $2,383 on a loan amount of $14,102, as of December 2019.
Where personal loans are headed
Consumers have better options than ever when it comes to unsecured personal debt. The increasing number of personal loan platforms in the space has driven innovation in underwriting, pricing and loan features.
Not only are there more personal loan lenders, but we’re now seeing personal lending products from credit card issuers like Citi and American Express who are making it easy for their cardholders to roll outstanding card balances into fixed-term loans.
We’re also seeing personal loan growth from new point-of-sale lenders like Affirm, GreenSky and Klarna, among others, which are allowing consumers to put an increasing variety of large purchases on installment payment plans at checkout.
These developments put pressure on personal loan lenders
Personal loan lenders will need to evolve if they hope to stay on the upward growth trajectory of the last several years. Many lenders have responded with increasingly sophisticated pricing and underwriting models, offering interest rate discounts if the consumer:
- Applies with a co-borrower
- Signs up for direct deposit
- Enrolls in auto-pay
Some lenders have gotten even more innovative, looking at how to disrupt adjacent spaces like auto or home equity loans or, in Upgrade’s case, launching an innovative line-of-credit/credit card hybrid product.
This innovation in the space is great for consumers, who now have better access to capital at lower rates than even just a few years ago, and it doesn’t show any signs of slowing down as we enter the 2020s.
This study drew on data from LendingTree, TransUnion and LendingClub.