Consumers Resist New Loans — How Leveraging Existing Ones Will Impact Banks, Inflation and the Greater Economy
Written by
Dawn Allcot
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Daria Uhlig
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Credit union customers’ loan balances grew in the second quarter of 2023, according to the new Credit Union Market Perspectives Report from credit bureau TransUnion. Credit unions were the only lender category that showed balance growth across the board. However, new credit slowed in all categories except for personal loans, the report showed.
“From the credit card side and the home equity [line of credit] side, a lot of loans originated over the past two years,” said Sean Flynn, senior community director of financial institutions at TransUnion. “I think people are starting to use those loans now … [T]hat’s reducing the need for the consumer to apply for new loans. I also think the rate environment has something to do with that.”
The rate environment is undoubtedly affecting mortgage origination growth, which was down 58.5% overall. Credit unions hold 23% of those originations, with 29% held by “other banks,” which are those not identified as “regional” or “national.”
In a phone interview with GOBankingRates, Flynn shed light on some of the market trends impacting consumers.
Consumers Are Paying Bills on Time
While Flynn emphasized that he is not an economist, he pointed to some bright spots regarding rising loan balances. Citing surveys, including one from the U.S. Census Bureau that found Americans were using credit cards and revolving lines of credit to make ends meet, he said that for the most part, delinquencies were stable in the second quarter based on the TransUnion report.
“Inflation has created a little bit of a pinch for some folks, and they’re leveraging those cards and leveraging some of their home equity lines to cover things they can’t cover now because things are so expensive,” he said.
However, solid employment figures and low delinquencies don’t point to this use of debt as a problem, necessarily. “People are still earning a paycheck,” Flynn said. “While people were using some of their lines of credit to pay for things or to go on summer vacations, they still have the money to repay those debts.”
The report shows that delinquency rates across all lenders remained relatively stable last quarter, with credit unions maintaining delinquency rates below 1% since the fourth quarter of 2019 (the earliest date shown in the report). After a steady climb following the end of simulus payments in 2021, delinquencies peaked for all lender types at the end of 2022 and since have fallen back to or below pre-pandemic levels for all lender categories exept fintech companies.
“Delinquencies are falling into a more normalized seasonal pattern — the pattern we saw normalized prior to the pandemic,” Flynn said.
He pointed out that delinquencies on personal loans and auto loans remain elevated, however. This could indicate a credit tightening in these areas.
Consumers Embrace Rate Shopping
Credit unions’ share of auto loan originations notably rose last quarter, the report showed. Credit unions now originate 35% of auto loan loans, second only to national banks, which have 57% of the market.
Noting that credit unions are not-for-profit, which allows them to offer a lower rate structure compared to banks, Flynn said the shift away from banks points to a desire on the part of consumers to find the best deals and keep monthly payments manageable.
“People are thinking really hard: ‘Do I want to get into a much higher rate than I have now if I want this car?'” Flynn said.
Too Soon To Compare
Flynn said he’s interested in seeing where originations go next quarter, when interest rates year-over-year will be more comparable because economic conditions will be more similar. If originations continue falling, it could reduce the flow of money and stem inflation, as the Fed intends. It could benefit rate-savvy consumers who turn to credit unions to get the best rates for their borrowing needs.
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