Consumer Credit (from both Traditional and Non-traditional Sources) Expands

The Federal Reserve Board recently reported that consumer credit outstanding rose by a seasonally adjusted annual rate of 5.6%, $192.2 billion, in August 2015, slower than the 6.6% rate of growth recorded in July and the 9.6% growth rate in June. Consumer credit outstanding is now at $3.470 trillion.

The expansion of total consumer credit outstanding partly reflected an increase in the outstanding amount of non-revolving consumer credit. Non-revolving consumer credit includes auto loans and student loans. According to the report, non-revolving credit outstanding grew by a seasonally adjusted annual rate of 5.7%, $143.8 billion, in August, 1.3 percentage points slower than the 7.0% growth rate recorded in July and 3.8 percentage points slower than the 9.5% rate of growth in June. There is now $2.551 trillion in outstanding non-revolving credit.

The increase in total consumer credit outstanding also reflected an expansion in revolving credit outstanding. Revolving credit outstanding, largely composed of consumer credit card debt, grew by a seasonally adjusted annual rate of 5.3%, $48.4 billion, in August, 0.2 percentage points slower than the 5.5% growth rate recorded in July and 4.5 percentage points slower than the 9.8% growth rate recorded in June. There is now $918 billion in outstanding non-revolving credit.

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While consumers account for all of the borrowers, according to the release, the major holders of consumer credit are depository institutions, finance companies, credit unions, the federal government, nonprofit and educational institutions, nonfinancial businesses, and pools of securitized assets. However, an alternative source of personal unsecured lending is one’s peers, known as peer-to-peer lending (P2P lending), a subset of crowdfunding. According to researchers at the Federal Reserve, in P2P lending, “individuals fund small portions of loans and receive their principal plus interest when the borrower repays the loan. Applicants allow the evaluation of their credit to be translated into a letter grade and investors can choose how much risk to take by deciding what portion and how many borrowing requests they would like to fund.

The paper further notes that “P2P lending provides funding that might not be available elsewhere and that rates are lower than for alternatives, such as payday loans.” Federal Reserve researchers identify Prosper, which started in 2006, and Lending Club, which began in 2007, as the two largest P2P sites. Similar to the Federal Reserve paper, this post uses loan level data from Lending Club because they make their data publicly available. Loans funded at Lending Club have a maturity of either 3 or 5 years. Using Lending Club borrower and lender activity as a barometer for the industry, P2P lending is still small, but its growth has been significant.

As part of the profile created to help lenders assess the funding request, borrowers are required to identify from a menu of options the intended purpose for the funds. The options include car payment, credit card repayment, debt consolidation, home improvement, major purchase, medical bills, moving expenses, renewable energy installations, house, small business funds, vacation costs, and weddings.

Figure 1 above shows the amount of total issuance, personal loans and small business loans, in each year since Lending Club has existed. The inset box shows the percent change in total issuance outside of small business loans and total issuance including small business loans. As the chart illustrates, personal consumer loans account for the majority of borrowing and lending activity. At the same time, the growth of borrowing and lending activity has been robust, growing at rate above 100% in every year between 2008 and 2013. However, the amount of activity started from a small base. In 2014, borrowing and lending of personal loans grew by “just” 77%.

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The primary purpose for using Lending Club for personal loans is debt consolidation. As Figure 2 above illustrates, debt consolidation accounted for 46% of borrower and lender activity in 2007 and its share has increased in each successive year. By the end of 2014, debt consolidation accounted for 63% of activity. The share of funds borrowed to repay credit cards saw its share shrink in 2008 and 2009, but the proportion attributed to this category has since risen and accounted for 24% of activity in 2014.

Meanwhile, funded requests for all of the other categories, divided between the specific “other” loan category and “all else”, a combination of car payment, major purchase, medical bills, moving expenses, renewable energy installations, house, vacation costs, and wedding funds, have seen their share shrink. In 2007 these two broad categories accounted for 30% of borrowing and lending activity, 16% in All Else and 14% in Other, but by 2014 they accounted for 7% of activity, 4% in All Else and 3% in Other.

Despite some fluctuation, the proportion of funds borrowed for home improvements has remained relatively steady. In 2007, 6% of borrowing was used for home improvements, after rising between 2008 and 2009, its share fell to 5% in 2012 and has remained there since then.

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The average interest rate remained relatively steady near 12% between 2007 and 2011, however, the rate rose in 2012 and 2013 before dipping back near its 2012 level in 2014. Meanwhile, since its high in 2007, the year of Lending Club’s inception, the net amount charged off relative to the amount of issued loans have trended downward. However, the charge-offs are based on the year the loan was funded and not the year that the charge-off took place. Since these loans cover either 3 or 5 years, then the trend in the final charge-off rate between 2012 and 2014, after all the loans mature, may more closely align with the 2012-2014 trend in the average interest rate.



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