Monthly Payment

RateGenius hits new milestone, aims for 400,000 refinanced contracts

AUSTIN, Texas - 

RateGenius, an online auto refinancing platform, recently reached a milestone by refinancing more than 334,738 installment contracts, saving customers an estimated $350.5 million since its inception in 1999.

“It’s gratifying to know that we've helped so many people save such a magnitude of money. Knowing that many people live paycheck to paycheck lets me know that we provide a valuable service, and I'm extremely proud of that,” RateGenius chief executive officer Chris Brown said.

RateGenius now looks forward to helping 400,000 people refinance their vehicles — 334,738 down, 62,262 to go.

“You do good things, good things come,” Brown said. “Our momentum is tremendous. People are realizing that we are great and are telling their friends. Word of mouth is one of the best forms of advertising.

“Every day the number of referrals that we get grows. We look forward to seeing our network grow and continuing to help as many people save money as we can,” Brown went on to say.


Edmunds notices down payments keep rising for used and new financing

SANTA MONICA, Calif. - 

While many of the August auto finance metrics Edmunds compiled and shared remained stable on a year-over-year basis, analysts did spot one rise that should be pleasing to finance companies.

Edmunds noticed increases in down payments in August for both new- and used-vehicle transactions, compared to the same month last year. For new models, the average down payment climbed by 5.9 percent to land at $3,667.

The average used-vehicle down-payment jump was even more, coming in at $2,480, which represented a 7.2 percent increase year-over-year.

Looking back to five years ago, Edmunds found that down payments on both used and new financing is much higher. Analysts pegged the rise on the new-model side at 9.1 percent and 14.7 percent for used vehicles.

As seen in the chart below, Edmunds determined four of the other major auto finance metrics did not change much in August.

New-Vehicle Financing Trends
  August 2017 Change from August 2016 5-Year Change
 Term  69.3 months  0.8%  6.8%
 Monthly Payment  $507  0.6%  10.1%
 Amount Financed  $30,473  0.2%  15.5%
 APR  4.8%  10.9%  17.8%

 

Used-Vehicle Financing Trends
  August 2017  Change from August 2016 5-Year Change
 Term  66.7 months  -0.1%  5.5%
 Monthly Payment   $382  1.4%  5.1%
 Amount Financed  $21,091  0.9%  11.2%
 APR  7.5%  2.6%  -6.1%

 

 

 


FIS and Equifax launch solution to prevent financial fraud and identity theft

ATLANTA - 

Your thumbprint isn’t just for your iPhone any longer.

FIS and Equifax recently teamed up to improve consumer experiences by bringing new levels of convenience and security to consumers challenged with maintaining multiple usernames and passwords to protect themselves from financial fraud and identity theft.

The two companies jointly now offer OnlyID, an identity verification solution that can provide a higher level of account protection and personal control through a single, secure digital log-in, consisting of the consumer's thumbprint or another unique identifier.

This identity solution, which can be used across multiple accounts, will be offered by financial institutions and e-retailers who participate in the OnlyID Network. In addition to providing security and convenience to consumers, OnlyID can benefit financial institutions and businesses by helping them reduce fraud claim costs, provide better digital experiences and increase consumer loyalty.

“Imagine if you no longer needed passwords to protect your digital identity because you had a unique, protected identifier that only you could use at the places where you bank and shop,” said Bruce Lowthers, head of FIS Payments.

“OnlyID from FIS and Equifax brings the power of advanced authentication technologies to make consumers' financial lives simpler while providing secure protection against fraud,” Lowthers continued.

Equifax and FIS, both trusted data stewards with powerful identity authentication and analytics capabilities, can deliver anti-fraud solutions to thousands of financial institutions. This joint effort will advance digital security and uniquely positions them to deliver a powerful, universal authentication service through OnlyID.

"OnlyID combines powerful predictive analytics with risk scoring models that generate a frictionless fraud assessment, without disruption to consumers or businesses,” Equifax president Trey Loughran said. “Our collective unique data assets, innovation and depth of expertise across Equifax and FIS enabled us to create a solution that will advance digital security over the web and via mobile devices.”

The two companies plan to co-market the OnlyID solution to banks, credit unions, retailers, telecommunications providers, utilities and other businesses.

“Passwords not only provide little security, they also result in cumbersome and clunky user experiences, particularly in the mobile environment," said Julie Conroy, research director at Aite Group. “The next generation of digital security leverages authenticators such as device-based security and biometrics, which provide greater levels of security as well as a better consumer experience.”

For more information about OnlyID from FIS and Equifax, visit .


Hyundai Capital America out to help customers hit by Harvey

IRVINE, Calif. - 

In a move similar to the one made by the captive for Toyota and Lexus, Hyundai Capital America, which does business as Hyundai Motor Finance, Genesis Finance and Kia Motors Finance, has announced that it is offering payment relief solutions to its customers affected by Hurricane Harvey.

“We are concerned about the well-being and immediate safety of our customers that have been displaced by this unprecedented storm,” Hyundai Capital America president and chief executive officer Ross Williams said.

“Our thoughts and prayers go out to everyone in Texas and all across the Gulf coast,” Williams went on to say

Hyundai Capital America indicated impacted lease and finance customers residing in the impacted areas may be eligible to take advantage of several payment relief options, some of which include:

—Payment extensions

—Redirecting billing statements

—Arranging phone or on-line payments free of charge

Customers who would like to discuss their account options are encouraged to Hyundai Motor Finance, Genesis Finance and Kia Motors Finance for further assistance.


Great Recession repeat not expected as payment performance likely softens

CARY, N.C. - 

As experts and policymakers shared a variety of economic trend updates and observations, Fitch Ratings summarized that record-setting payment performance isn’t likely to simply last forever.

But at the same time, Fitch reiterated that deterioration of auto finance performance — especially in the subprime space — won’t pull the entire economy into a tailspin like some pontificators keep trying to allege.

In analysis released this week, Fitch acknowledged the continued financial resilience of the U.S. consumer has prolonged a period of “extremely strong” asset quality among many U.S. consumer lending segments. However, analysts insisted that U.S. consumer loan losses at financial institutions are at “unsustainable” cyclical lows and a more meaningful amount of credit deterioration should be expected over the near to medium term.

“This will particularly be the case should unemployment claims begin to reverse after reaching multi-decade lows,” Fitch said.

A month after the rate tied a 10-year low, S&P Dow Jones Indices and Experian released data through June on Tuesday and determined auto loan defaults decreased 3 basis points from the previous month to settle at a new low mark of 0.82 percent. The May reading had tied for the lowest mark analysts have seen during the past 10 years. In June 2015, the auto finance default rate also stood at 0.85 percent.

The new low record might not last, as the rate has made an upward movement from June into July during five of the past eight years. The most pronounced rise in the cyclical pattern arrived in the immediate aftermath of the Great Recession, when the rate in June 2009 of 2.18 percent jumped to 2.46 percent a month later.

Fitch explained the extent to which weaker credit performance will be a challenge for individual consumer lenders and finance companies will vary depending on the diversity of their activities and the extent to which they have strengthened capital and loss reserves to absorb higher losses. Analysts added their willingness to tighten underwriting standards in recent quarters in anticipation of a weaker macroeconomic environment will also be a key factor.

“Reflecting these dynamics, Fitch believes diversified banks are better positioned than mono-line lenders to weather meaningful erosion in consumer asset quality,” analysts said.

Fitch also pointed out that credit cards and auto loans — particularly retail credit cards and subprime vehicle installment contracts — will be the consumer loan segments most likely to see asset quality deterioration in the near to medium term. The firm noted higher loss rates and delinquencies have already begun to materialize.

“Drivers of weaker credit performance include stronger loan growth in recent years, increased competition leading to looser underwriting standards in the post-financial crisis period (including greater exposure to subprime borrowers) and, in the case of auto lending, residual values that have been supported by unsustainably high used vehicle prices,” analysts said.

According to Federal Reserve surveys, banks have begun tightening underwriting standards in both segments over the past several quarters.

“The potential systemic impacts of a rapid deterioration in either credit card or auto lending are limited relative to pre-crisis residential mortgage lending,” Fitch said. “Both segments are much smaller than residential mortgage debt with shorter loan durations and smaller loan balances.”

Ability to maintain payments

While Fitch referenced the impact unemployment might have on consumers’ ability to maintain their debt commitments, the latest analysis from Comerica Bank took a closer look at the latest federal employment report that indicated payroll employment increased by 222,000 net jobs in June.

Comerica Bank mentioned that revised figures for April and May triggered the unemployment rate to tick up slightly to 4.4 percent.

“This is not a sign of a cooling labor market. We expect that labor market conditions will continue to tighten through the second half of this year,” Comerica Bank chief economist Robert Dye said in the commentary.

Comerica also mentioned the average workweek inched up by one tenth of an hour to 34.5, and average hourly earnings increased moderately by 4 cents, or 0.2 percent.

“So this labor report hit the trifecta, showing that more workers worked longer hours and got paid more for it,” Dye said. “This is supportive of income growth in June and beyond and consumer spending, too.”

Comerica Bank maintained that despite this labor market data, the Federal Reserve is likely to leave interest rates where they currently are at 1.25 percent when the Federal Open Market Committee meets beginning on Tuesday. Dye is also projecting that the Fed will announce the beginning of balance sheet reduction at its September meeting and that another 0.25 interest rate rise should come in December.

During her semiannual appearance before the House Financial Services Committee, Federal Reserve chair Janet Yellen reiterated the strategy policymakers plan to leverage.

“The committee continues to expect that the evolution of the economy will warrant gradual increases in the federal funds rate over time to achieve and maintain maximum employment and stable prices,” Yellen said in her prepared testimony. “That expectation is based on our view that the federal funds rate remains somewhat below its neutral level — that is, the level of the federal funds rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel.

“Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance,” she continued. “But because we also anticipate that the factors that are currently holding down the neutral rate will diminish somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion and return inflation to our 2 percent goal.

“Even so, the committee continues to anticipate that the longer-run neutral level of the federal funds rate is likely to remain below levels that prevailed in previous decades,” Yellen went on to say.

And with regard to rate hikes the Fed already made, TransUnion’s analysis showed that most borrowers were able to absorb their increased monthly payment obligations after the Fed’s rate hike last December.

TransUnion’s study identified these 63 million consumers because they carried debts for which the minimum monthly payment due was tied to the market interest rate, such that a rise in rates from the December rate hike could cause an increase in payments required. TransUnion used its CreditVision aggregate excess payment (AEP) algorithm, which incorporates monthly payments from mortgages, credit cards and other debt obligations, to identify 10.6 million of these consumers who were at elevated risk of not having the capacity to absorb a rate increase of 0.25 percent.

The study then tracked the performance of these consumers through the end of March to give the December rate increase enough time to affect payment obligations. The study found that, in fact, only 1 million of these consumers were delinquent at the end of March. This was slightly lower than the study’s control group, who had no variable-rate products.

TransUnion explained this result implies that consumers with variable-rate credit were able to manage the rate increase as well as, or better than, consumers without variable-rate products.

“When we announced our ‘capacity to absorb a rate increase’ metric last May we said that it was a conservative measure of risk, in that it did not account for contributions to savings or investments that could be reallocated to cover debt service increases,” said Ezra Becker, senior vice president of research and consulting at TransUnion.

“We described our metric as an upper bound on the number of consumers who would struggle with a rate increase,” Becker continued. “We’re pleased to see that only 10 percent of those consumers we had considered at elevated risk of payment shock from a rate increase exhibited delinquency over the study period. Most consumers appeared able to reallocate their available cash, or make small changes to their spending habits, to effectively absorb the December rate increase.”

More about the overall economy

Fitch is maintaining its view that U.S. GDP growth will rise in 2017 and 2018.

“Increases in interest rates unaccompanied by meaningful economic growth and expanding wages could pressure consumer asset quality as it would result in increased debt service (for floating-rate obligations) and elevated refinancing risk without the benefit of higher income to absorb these costs,” analysts said.

“We believe that recent Fed rate hikes are part of long-term monetary policy normalization that is aligned with current macroeconomic conditions and the outlook,” they continued.

 In the first quarter, Fitch mentioned U.S. consumer debt returned to its pre-crisis peak of $12.7 trillion after falling to a post-crisis low of $11.2 trillion in 2Q13. The student loan and auto segments have had the most pronounced increases, although credit card debt has also accelerated recently.

Between Q4 2008 and Q1 2017, Fitch calculated that student loan debt more than doubled to $1.3 trillion while auto finance balances increased by 48 percent to $1.2 trillion.

Over the same period, Fitch added that the much larger mortgage component of consumer debt declined by 6.8 percent to $8.6 trillion from a peak of $9.3 trillion, reflecting substantially tighter underwriting amid increased regulation and the exit of many non-bank lenders.

“Looking ahead, my colleagues on the FOMC and I expect that, with further gradual adjustments in the stance of monetary policy, the economy will continue to expand at a moderate pace over the next couple of years, with the job market strengthening somewhat further and inflation rising to 2 percent,” Yellen told House lawmakers.

“This judgment reflects our view that monetary policy remains accommodative,” she continued. “Ongoing job gains should continue to support the growth of incomes and, therefore, consumer spending; global economic growth should support further gains in U.S. exports; and favorable financial conditions, coupled with the prospect of continued gains in domestic and foreign spending and the ongoing recovery in drilling activity, should continue to support business investment.

“These developments should increase resource utilization somewhat further, thereby fostering a stronger pace of wage and price increases,” Yellen added.


Survey shows strong support for ‘futuristic’ payment technologies

ORLANDO, Fla. - 

How contract holders in your auto finance portfolio make future payments continues to be an evolving topic, as a recent survey conducted by Viewpost showed.

Viewpost, a network for invoicing, payments and cash management, produced a survey of American consumers covering the future of payments and key issues around awareness of payment technologies, as well as perceptions about what will be the most popular and useful tools for paying and getting paid in the future.

The company surveyed a cross-section of 1,000 U.S.-based consumers, finding that overall, 80 percent of Americans are in support of “futuristic” payments technologies and currencies, including tools like sensor fingerprinting, facial recognition, retinal scanning and voice control, as well as currencies like bitcoin.

The company acknowledged electronic payments have become commonplace today, with nearly 51 percent of people reporting that they are paid electronically via direct deposit, and an increasing comfort level with these paperless transactions appears significant in driving consumers’ interest in even more sophisticated forms of electronic payment.

Respondents are unenthusiastic about traditional paper checks, as one-third of them think that paper checks will die within five years, and 83 percent believe they will be completely eliminated within the next 20 years.

Similarly, only 11 percent of Americans think that companies will bill their customers via paper in the future, while over half of Americans (54 percent) believe that companies will bill their customers via automatic payments from their bank account or credit card.

A mobile and app-based future is definitely on consumers’ minds, with 52 percent saying they believe that payments between companies and customers will be exchanged via mobile app.

Futuristic currencies and payment technologies — particularly biometrics — are highly anticipated, and Viewpost’s survey data bears this out. Notable findings include:

• Sensor fingerprinting: 50 percent of Americans believe fingerprint technology will be used for authentication to pay and receive payments over the next 10 years.

• Facial recognition: 35 percent see facial recognition as a key authentication technology for making payments within the next 10 years, and 32 percent of Americans trust facial recognition for securing electronic payments.

• Retinal scanning and voice control — these advanced biometric methods have gained traction in consumers’ consciousness, with some 31 percent citing retinal scanning as a viable technology for authenticating payments and 18 percent seeing themselves using voice control to make payments by 2027.

Viewpost insisted that consumers are clearly not afraid of new technologies that can make electronic transactions more secure, frictionless and, therefore, simpler. Even previously maligned technologies like bitcoin are seeing acceptance, as some 21 percent of consumers see it as a viable currency within the next 10 years.

“People are willing to embrace a more convenient, frictionless payments future,” Viewpost chief executive officer Max Eliscu said. “Paper invoicing and checks are well on their way out in the consumer setting, and more businesses across the spectrum are beginning to follow suit with transactions among their trading partners.

“But electronic invoicing and payments are just the beginning — the future of the payments industry is highly dependent on leveraging innovation like biometrics, data integration, and a growing variety of payment methods to securely drive more volume with visibility, speed and simplicity,” Eliscu went on to say.


New record set within June’s new & used finance data

IRVINE and SANTA MONICA, Calif. - 

As buyers’ appetites for bigger and more expensive vehicles grow, Edmunds found the contract term length for new-model financing reached an all-time high in June with the terms for used-vehicle deliveries not far off that record-setting pace.

According to a new analysis released on Monday, Edmunds determined the average contract length for new-vehicle financing stretched to 69.3 months in June — up 6.8 percent from five years ago.

On the used-vehicle side, analysts indicated term length grew by 6.0 percent during the past five years to land at 66.9 months in June.

While the term lengths might be similar, the other metrics Edmunds shared in the used-vehicle market versus the new-model realm showed the variance in financial capacity and willingness to take on debt.

Edmunds found the average amount new-car buyers financed in June recorded the biggest uptick for the year, hitting $30,945; that’s a spike of $631 from May. With a larger outstanding balance, Edmunds pointed out these buyers are now carrying the highest monthly payments for the year, averaging $517 in June, which is up from $510 in May.

As far as used vehicles, Edmunds’ analysis showed the average amount financed sat at $21,142, leaving contract holders with a monthly payment at $383.

“Stretching out loan terms to secure a monthly payment they’re comfortable with is becoming buyers’ go-to way to get the cars they want, equipped the way they want them,” said Edmunds executive director of industry analysis Jessica Caldwell.

“It’s financially risky, leaving borrowers exposed to being upside down on their vehicles for a large chunk of their loans, but it’s also a sign that consumers are still confident enough in the economy to spend more on their vehicles and commit to paying for them longer,” Caldwell continued.

Finance companies are attempting to mitigate their risk by securing larger down payments for both new- and used-vehicle deliveries.

In June, down payments jumped by healthy amounts on a year-over-year basis, rising 7.1 percent to $2,453 for used-vehicle deals and climbing 6.6 percent to $3,687 for new-model deliveries.

Also of note, Edmunds also noticed that the APR on new-vehicle financing dipped just below 5 percent for the first time since February, averaging 4.96 percent in June. The APR has increased 5.7 percent from a year ago and 13.6 percent from five years ago.

For used-car financing, the average APR came in at 7.64 percent, which is 2.7 percent higher year-over-year, according to Edmunds, which also pointed out that the June average rate was actually 5.4 percent lower than five years ago.

Meanwhile, the analysts over at Kelley Blue Book also added to the discussion, sharing on Monday that their estimated average transaction price (ATP) for light vehicles in the United States came in at $34,442 in June.

KBB reported new-car prices have increased by $511 or 1.5 percent year-over-year, while remaining relatively flat compared to May.  

“Transaction prices grew more slowly than normal in June, increasing less than 2 percent,” said Tim Fleming, analyst for Kelley Blue Book. “As the industry enters a ‘post-peak’ environment for new-car sales, more pressure will be placed on transaction prices. 

“Kelley Blue Book is seeing more mixed results among manufacturers and popular segments, such as full-size trucks and mid-size cars, both of which are flat, as well as compact SUVs, which rose 1 percent. These trends are likely to continue as retail sales weaken,” Fleming went on to say.


Pelican chooses Payix for collections & mobile app

FORT WORTH, Texas and SAN DIEGO - 

This week, Pelican Auto Finance selected Payix to provide its collections tools, including its new mobile collections application. The tools are designed to help Pelican better connect with its contract holders and improve its ability to collect installment payments.

The companies highlighted the mobile app and other tools are white labeled and integrate with Pelican’s portfolio management system in real time. They allow borrowers to make payments quickly, easily and securely — and without paying convenience fees often charged by other payment processors.

The app is now available to Pelican borrowers under the finance company’s name in Google Play and the App Store.

“The Payix mobile app is for reaching more than millennials. It’s exactly what the subprime automotive finance market needs to reach all of its borrowers,” said Joel Kennedy, chief operating officer of Pelican Auto Finance. “It allows us to seamlessly integrate consumer payments and communications into our system, and it makes it incredibly easy for our customers to engage with us, too.

“I really think any lender without an app like this runs the risk of falling behind,” Kennedy added.

In addition to providing collections tools, Payix also offers payment processing resources and business intelligence solutions typically available only to large-scale finance companies. Now providers of any size have access to a broad range of resources that are effective, affordable and easy-to-use, according to Payix president Chris Chestnut.

“We’re excited to have been selected by the great team at Pelican Auto Finance to provide our collections tools and payment processing resources,” Chestnut said.

“As a new company, we really appreciate being able to work with a lender as experienced and knowledgeable as Pelican,” he continued. “Their help and support have been invaluable to us, and we’re 100 percent committed to providing them with solutions that help their business and borrowers succeed.”


Q1 data disputes ‘subprime bubble' talk again

SCHAUMBURG, Ill. - 

Experian Automotive tried again this week to pop the talk about a “subprime auto loan bubble.”

Analysts said, “There’s always someone who claims that the bubble is bursting. But a level-headed look at the data shows otherwise.”

According to Experian’s State of the Automotive Finance Market report, 30-day delinquencies dropped and subprime auto financing reached a 10-year record low for the first quarter. Analysts indicated the 30-day delinquency rate dropped from 2.1 percent in Q1 2016 to 1.96 percent in Q1 2017, while the total share of subprime and deep-subprime installment contracts dropped from 26.48 percent in Q1 2016 to 24.1 percent in Q1 2017.

“The truth is, lenders are making rational decisions based on shifts in the market. When delinquencies started to go up, the lending industry shifted to more creditworthy customers. This is borne out in the rise in customers’ average credit scores for both new and used vehicle loans,” analysts said.

Experian noted that the average customer credit score for a new-vehicle contract rose from 712 in Q1 2016 to 717 in Q1 2017.

The company added the average customer credit score for a used-vehicle loan rose from 645 in Q1 2016 to 652 in Q1 2017.

In what Experian called “a clear indication” that finance companies have shifted focus to more creditworthy customers, super prime was the only risk tier to grow for new-vehicle financing from Q1 2016 to Q1 2017. Super-prime share moved from 27.4 percent in Q1 2016 to 29.12 percent in Q1 2017.

All other risk tiers lost share in the new-vehicle financing category:

• Prime: 43.36 percent in Q1 2016 to 43.04 percent in Q1 2017.

• Nonprime: 17.83 percent in Q1 2016 to 16.96 percent in Q1 2017.

• Subprime: 10.64 percent in Q1 2016 to 10.1 percent in Q1 2017.

For used-vehicle financing, Experian spotted a similar upward shift in creditworthiness.

Prime and super-prime risk tiers combined for 47.4 percent market share in Q1 2017, up from 43.99 percent in Q1 2017.

At the low end of the credit spectrum, subprime and deep-subprime shares fell from 34.31 percent in Q1 2016 to 31.27 percent in Q1 2017.

“The upward shift in used vehicle loan creditworthiness is likely caused by an ample supply of late model used vehicles,” Experian analysts said. “Leasing has been on the rise for the past several years (and is at 31.06 percent of all new vehicle financing today).

“Many of these leased vehicles have come back to the market as low-mileage used vehicles, perfect for CPO programs,” they went on to say.

Experian also mentioned another key indicator of the lease-to-certified pre-owned impact is the rise in used-vehicle financing share for captives. In Q1 2017, captives had 8.3 percent used-vehicle share, compared with 7.2 percent in Q1 2016.

In other findings:

• Captives continued to dominate new-vehicle financing share, moving from 49.4 percent in Q1 2016 to 53.9 percent in Q1 2017.

• 60-day delinquencies showed a slight rise, going from 0.61 percent in Q1 2016 to 0.67 percent in Q1 2017.

• The average new vehicle contract reached a record high of $30,534.

• The average monthly payment for a new vehicle installment contract reached a record high of $509.


Maintaining auto payment no longer top consumer priority

CHICAGO - 

TransUnion discovered that maintaining payments on that vehicle installment contract no longer is the top priority when the holder hits a rough financial patch and has to adjust to being short on monthly income.

When faced with the choice of which debts to pay and which to miss, the latest TransUnion study found that consumers in financial distress tend to prioritize unsecured personal loans ahead of other credit products such as auto financing, mortgages and credit cards. These findings were released during TransUnion’s annual Financial Services Summit, attended by more than 300 senior-level financial services executives from around the globe. 

The study incorporates unsecured personal loans for the first time since TransUnion began analyzing the payment hierarchy dynamic in 2010. Beyond personal loans, this most recent analysis is consistent with prior TransUnion studies in finding that consumers have historically prioritized auto finance payments over their mortgages and credit cards, and have done so consistently since at least the beginning of 2004.

“It is quite surprising to us that, for most struggling consumers, unsecured personal loan payments are prioritized over other prominent credit products such as mortgages and auto loans,” said Ezra Becker, senior vice president and head of research for TransUnion’s financial services business unit.

“While personal loans have existed for a long time, recent growth in the number of such loans led us explore this product’s position along the payment spectrum,” Becker continued. “The prioritization of personal loan payments above all others is counterintuitive, but our study results are clear.

“We believe the relatively short duration of these loans — usually less than 30 months — is a key factor in the decision process of consumers,” he went on to say.

Recent TransUnion data show that average term lengths are much shorter for unsecured personal loans. For loans originated in Q4 2016, unsecured personal loans had an average term of 28 months. In this same timeframe, the length of vehicle installment contracts averaged 60 months and mortgages averaged 230 months.

“We conjecture that personal loan borrowers may feel they can get a quick win with these loans even when they are struggling, and there is a clear, near-term end to the obligation — a ‘light at the end of the tunnel,’ in a sense,” said Becker.

“In contrast, auto loans and mortgages have much longer terms, and credit cards have no set end date,” he continued. “Finding an opportunity to pay a debt in full can be a powerful motivator for a struggling consumer.”

Historical payment patterns ‘shocked’ during great recession

Prior to including unsecured personal loans in the payment hierarchy analysis, TransUnion had reviewed payment patterns for auto financing, credit cards and mortgages. Since at least 2004, consumers with auto financing, credit card and mortgage have prioritized their vehicle payments.

Mortgages have traditionally been the second payment made, followed by credit cards.

“Auto loans have traditionally been the prioritized payment because most people need a car to get to and from work, run errands or bring their kids to school or other activities,” said Nidhi Verma, senior director of research and consulting in TransUnion’s financial services business unit.

“The far majority of the population does not live in markets such as downtown New York or Chicago, which have strong public transportation infrastructures. Viable alternatives to owning a car are scarce, hence the need to keep up with auto loan payments,” Verma continued.

Analysts determined this dynamic changed dramatically during the Great Recession as the housing crisis devalued millions of homes. As a result, the payment hierarchy flipped in Q3 2008, with consumers paying their credit cards prior to their mortgages.

“As housing values began crashing in 2007 and 2008, many homeowners found themselves ‘underwater’ on their mortgages, meaning they owed more on their mortgages than the value of their homes. With unemployment sharply rising, a lot of these borrowers began to emphasize their credit card payments, protecting their liquidity as a vehicle to pay their bills or simply to put food on the table,” Verma said.

TransUnion asserted this trend lasted well into the housing market recovery, reverting to the historical norm in Q1 2014.

“The payment hierarchy is complex — the decision process for struggling borrowers is a difficult one,” Becker said. “We confirmed through our study that both the strength of the labor market and housing values continue to be critical drivers of that decision process.

“In addition, the timing of consequences, availability of alternatives and social stigma all play a role,” he continued. “The housing crisis was a shock to the system that we fervently hope was a once-in-a-lifetime occasion.

“Barring another such trauma to the consumer credit market, we believe financially constrained borrowers will tend to pay their personal loans, auto loans, mortgages and credit cards in that order,” Becker concluded.


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