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We still have a long way to go before our economy returns to normal, but increasingly encouraging signs are on the horizon. Personal loans point to that hope, which is expected to surpass 2019 levels in 2022, according to a recent report from TransUnion. Here’s the scoop.
What is a personal loan arrangement?
“Origination” refers to the process of taking out a new loan. That said, personal loan originations refer to the number of personal loans taken out, not the number of people who took out personal loans. For example, if someone took out two personal loans in one year, that would result in two loans. Additionally, according to TransUnion, there were 18.8 million personal loans in 2019. In other words, 18.8 million personal loans were taken out in that year.
Origins of personal loans over the years
The number of personal loans is something economists look at when measuring the health of the economy. If the economy is performing well, you will generally see a steady number of personal loans, if not an increase. However, if the economy is in trouble, the number of personal loans generally decreases.
According to TransUnion, here is an overview of personal loan originations since 2019.
The number of personal loans fell sharply in 2020 when the pandemic started. Lenders weren’t too sure about people’s chances of repaying their personal loans given the tough economic conditions, and so they tightened their qualification requirements.
Now that economic conditions are improving, TransUnion expects the number of personal loans in 2022 to increase. This is good news for people who may need to take out a personal loan.
Preferred and non-preferred borrowers
Although TransUnion plans more personal loans in the coming year, some groups are expected to benefit more than others. Personal loans are expected to grow 14% among primary borrowers in 2022 from a year earlier, while they will grow slightly less – just 11% – among non-primary borrowers.
According to the Consumer Financial Protection Bureau (CFPB), prime borrowers are people with credit scores between 660 and 719. Unpreferred borrowers have credit scores ranging from 580 to 659.
It’s important to note that the TransUnion study only provides projections, not hard numbers. If Covid-19 continues to disrupt the economy, a new variant emerges, or some other unexpected event occurs – and recent years have told us that is a possibility – then these projections may prove to be inaccurate.
If you find yourself with an unpreferred credit score and are concerned that someone with a top credit score has an unfair advantage, don’t be. The difference between 11% and 14% is meager, and when the dust settles, it may disappear anyway.
Origin of personal loans compared to other credit products
Personal loans are convenient to consider due to their wide range of uses. But that’s not the only type of credit account you might be interested in as a consumer, and that’s why economists are looking at other loans as well.
Here’s TransUnion’s auto loan and credit card predictions for 2022.
Since the start of the pandemic, car loans have not fallen as much as personal loans. TransUnion forecasts an increase in auto loans through 2022, in part due to increased lending to subprime borrowers.
Credit card creations have had an interesting journey. Lenders limited the number of new credit cards they issued in the first year of the pandemic (2020). But by 2021, they had restarted the engine with higher credit card issues than just before the pandemic started.
Although the number of credit card issues has increased, credit card balances (ie the amount people owe on their cards) are also expected to increase. Specifically, TransUnion predicts that more people will use their cards in the first quarter of 2022, leading to higher balances. After that, they predict that credit card balances over the next three quarters will remain relatively stable.
Here’s a look at credit card creations over the years and what might be coming in 2022.
How will personal loans continue to change in the future?
Lenders are “eager to grow,” according to Liz Pagel, senior vice president and head of consumer lending at TransUnion, and that means increasing lending. As we have seen, this includes applicants who in recent years have not been so able to obtain loans.
Some of these increases in debt will feed into each other. For example, as credit card balances increase in 2022, TransUnion predicts that there will be more personal loans issued as debt consolidation loans to combine all of that higher interest rate debt.
Another question mark on the horizon is where the federal funds rate will go, which has a big impact on the cost of taking out a personal loan. Currently, the effective federal funds rate is close to zero, but projections anticipate that it will increase in 2022. This can make personal loans more expensive, and it could deter some people from taking them.
Only time will tell what the future holds, and given all the uncertainty in the world, it’s a good reminder that predictions aren’t 100% true until it happens.
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