Eye On Housing
Consumer credit outstanding grew by a seasonally adjusted annual rate of 5.5%, $191.8 billion, in the month of October 2015, 4.4 percentage point slower than the 9.9% rate of growth recorded in September 2015. Consumer credit outstanding now totals $3.512 trillion.
The increase in total consumer credit outstanding largely reflected an expansion 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 rose by a seasonally adjusted annual rate of 7.4%, $189.6 billion, in October, 2.9 percentage points slower than its level in September, 10.3%. There is now $2.589 trillion in outstanding non-revolving credit.
The increase in total consumer credit outstanding also reflected an expansion in the outstanding amount of revolving consumer credit. Revolving credit, which is largely composed of credit card debt, increased by 0.2%, $2.1 billion, over the month of October, 8.5 percentage points slower than the 8.7% rate of growth in September. There is now $923.6 billion in outstanding revolving credit.
An earlier post demonstrated that not only is the outstanding amount of consumer credit growing at traditional sources of consumer credit, but it is also increasing at a non-traditional source as well. The funded amount of borrower requests via peer-to-peer lending site LendingClub.com has soared since its inception in 2007, however it began at very low levels.
Debt consolidation and credit card repayments are the two primary purposes of loans borrowed via peer-to-peer lending. Behind debt consolidation and credit card repayments, the third largest purpose for borrowed funds is for home improvements. Figure 1 above shows the amount of total issuance for home improvements in each year since Lending Club has existed. The inset box shows the percent change in each year. As the chart illustrates, growth in personal consumer loans used for home improvements is robust. Between 2008 and 2013, annual growth in the total funded amount of home improvement loans in a given year exceeded 100% in every year but 2012. However, since 2013, the annual growth rate has slowed and as of 2015, which includes the first 3 quarters of this year, growth in loans for the purpose of home improvements is currently 34% above its total for 2014.
Borrowers seeking peer-funded personal loans for the purpose of home improvements are overwhelmingly homeowners. As part of the loan application process, borrowers convey their homeownership status. In aggregate, 60% of borrowers are homeowners, but 93% of borrowers intending to use the loan for home improvements are homeowners. Meanwhile, the distribution borrowers intending to use the funds for debt consolidation or for credit card repayment is closer to the aggregate composition. For all other loans*, which includes a combination of car payment, major purchase, medical bills, moving expenses, renewable energy installations, house, vacation costs, wedding funds, and other, renters make up the majority of borrowers albeit the distribution is more evenly divided.
Home improvement loans tend to be smaller than debt consolidation loans and loans to repay credit card debt. In aggregate, the median funded amount of all personal loans was $12,975. The median funded amount for loans used to consolidate debt was $14,000 the same amount for personal loans used to service credit cards. The median home improvement loan is $12,000, lower than the median loan for debt consolidation or to repay credit cards, but greater than the median amount borrowed for any other purpose.
Meanwhile, the median interest rate on home improvement loans, 13.0%, is slightly below the median interest rate on all funded loans, 13.1%. Only loans used for the purpose of consolidating debt have a lower median interest rate, 12.0%. In contrast, the median interest rate on credit cards, 13.4% and on all other loans, 14.1%, tend to be higher.
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* LendingClub.com includes fields for both the purpose and a description for each loan. This post analyzes the purpose category only. While the purpose is always completed, the description can be answered at the borrower’s discretion. A handful of loans with the designated purpose of “other” or “major purchase” are used for home improvements often in tandem with another purpose such as debt consolidation. For example, a borrower may list “other” as the purpose and then cite debt consolidation and home improvements in the description. This analysis and all previous analysis does not attempt to reassign these loans from their original purpose. An attempt to reassign loans that fit the above description and distribute the total loan amount evenly amongst all of the purposes cited in the description did not alter the narrative.
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