Average personal loan debt per consumer
Loan balances also increased in 2020, but barely. The average loan balance increased by 1.2% – $ 199 – per consumer between 2019 and 2020. You can come to this conclusion by looking at the percentage change in total debt outstanding (6%) and in the number total accounts (8%). If the number of accounts remained stable but the total outstanding debt increased, this would have resulted in a larger increase in the average loan balance.
While consumers opened 3.1 million new personal accounts in 2020, this is less than the number of accounts opened in 2019. In fact, new account openings or personal loan arrangements – the process by which a borrower applies for a loan and a lender accepts its application — are down 26.5% in 2020 from 2019, according to a Credit Karma report.
Average personal loan size
The average amount of personal loans also declined during the pandemic. In May 2020, just two months after the declaration of the Covid-19 pandemic, the amount of loans began to decline. In December 2020, the average loan amount was $ 4,815, down about 20% – or $ 1,197 – from January 2020, according to Credit Karma.
However, “there is a typical seasonal decline towards the end of the year each year,” according to Credit Karma. “The decline may well be related to this seasonal trend.”
While the decline in loan sizes in December could have been a seasonal trend, the decline that started in May does not appear to be. This could be due to tighter qualification requirements for lenders and the number of loans they were willing to give.
Comparing May to June (the period when the 2020 decline began) for 2019 and 2020 gives a more accurate picture of the initial impact of the pandemic. In May 2019, the average loan amount was $ 6,099, while in June 2019 it was $ 6,137, an increase of $ 38. Conversely, in May 2020, the average loan amount was $ 6,509, while in June 2020, it was $ 6,117, a decrease of $ 390.
Common uses of personal loans
Considering the slowdown in the growth of personal loans, you may think that the pandemic has caused a shift in the way consumers are using personal loans. This does not seem to be the case.
Debt consolidation Where refinancing credit card debt remained the main reason for apply for a personal loan, just like before the start of the pandemic, according to Credit Karma. Borrowing for home improvement projects rose slightly after the start of the pandemic, which may reflect more people starting home improvement projects while quarantined at home.
Credit Ratings Among Personal Loan Holders
Although it is not related to the overall indebtedness of personal loans, credit scores among the personal loan holders provide insight into how the lenders have qualified the loans. Lenders have started to tighten their qualification requirements at the start of the pandemic between March and April.
When the pandemic hit, people with personal credit scores between 600 and 659 saw the biggest drop in approvals. Additionally, data from TransUnion shows that the average credit score of consumers with an open personal loan increased during Covid-19. In December 2020, the average score was 643.
It is obvious that lenders tend to give loans to people with higher credit scores because higher scores are a sign of financial responsibility. Although it is not impossible to obtain a personal loan with bad credit during the pandemic, as evidenced by the average credit score of loan holders in the fair credit range, this is a greater challenge than in December 2019.
Personal loan vs other debt
Americans have also changed their ways with other types of debt in 2020.
Revolving credit is financing that you can reuse as you pay off your balance, such as credit card, personal lines of credit and Home equity lines of credit (HELOC). Non-revolving credit, on the other hand, is a lump sum of money that you pay off in fixed monthly installments and that you cannot reuse once paid off. These accounts include auto loans and all other non-revolving loans, such as personal loans and loans for mobile homes, education, boats, trailers or vehicles. vacations.
Revolving debt hit $ 974.9 billion in 2020, down 10.55% – $ 115.1 billion – from $ 1.09 trillion in 2019, according to the Federal Reserve. In short, people have started paying off their credit card debt in 2020.
On the other hand, non-revolving debt hit a record high of $ 3.20 trillion in 2020, up 3.9% – $ 120 billion – from 2019.
“While personal loans continue to be a great option for many clients, clients have other options,” says Matt Lattman, vice president of personal loans at Discover. “For example, many consumers who own a home and want to make improvements have taken advantage of low mortgage rates and used home equity loans. “
How will personal loans develop in the future?
Personal loans remain a common funding method for people looking to access additional cash. While we cannot predict the future, trends indicate that personal debt will continue to grow in the years to come. However, the economy will play a key role in how lenders provide these loans and the number of Americans who will need to access financing.