Inflation Impact: Unsecured Loans and Credit Card Spending Are on the Rise — What Are the Risks?

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Following a slowdown in credit card spending and unsecured personal loans during the COVID-19 pandemic, both are back on the rise in a big way. Bankcard balances in the U.S. hit a record high during the 2022 third quarter, according to a new report from TransUnion. Meanwhile, unsecured personal loans have seen record growth in both originations and balances.

TransUnion’s Q3 2022 Quarterly Credit Industry Insights Report, released on Nov. 8, found that credit card balances reached $866 billion during the third quarter, up 19% from the previous year. The gain was heavily driven by growth among Gen Z and millennial borrowers, whose balances grew by 72% and 32%, respectively.

Record growth in unsecured personal loans — those that are not backed by collateral — has been partly driven by significant increases in lending to below-prime risk tiers, TransUnion said in a press release. This increase, combined with a general deterioration in the financial health of subprime consumers due to soaring inflation, has led to a similar rise in delinquencies, which have now surpassed pre-pandemic levels.

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“Inflation is a factor in that it has probably played a part in the increased demand for personal loans during the first half of the year,” Salman Chand, vice president of consumer lending at TransUnion, told GOBankingRates in an email. “But we have also seen very strong willingness/ability from lenders to originate more loans during the first half of the year. This is likely driven by increased availability of capital that lenders wanted or needed to deploy during that period.”

TransUnion found that consumers with access to personal loans rose to 22 million during Q3 2022 from 19.2 million the previous year. The average personal loan debt per borrower climbed to $10,749 from $9,387. The average credit card debt per borrower also shot up, from $4,857 during the 2021 third quarter to $5,474 during the 2022 third quarter.

Although unsecured personal loans provide a way for people to pay expenses when they are short on cash, they also carry risks. Interest rates are typically higher for unsecured loans vs. secured loans. In some cases, the interest rate is considerably higher, making them harder to pay off.

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You don’t have to worry about losing your collateral with an unsecured loan. But as Experian noted on its website, the cascading effects of falling behind on your payments can do considerable damage to your credit and your finances.

If an unsecured loan goes into default, your credit score will take a big hit and the default might stay on your credit report for up to seven years, according to LendingTree. This can make it difficult to qualify for future loans. You might also face wage garnishments, lawsuits and liens against your property from your lender.

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