Record number had unsecured 2Q personal loans

A record 22.7 million Americans had outstanding unsecured personal loans at the end of the second quarter of this year, according to a brief from the Federal Reserve Banks of New York and St. Louis. 

According to the report, fintech loans fueled a 21 percent increase in unsecured personal loans originated in the second quarter of this year to 27.2 million. Unsecured personal loan obligations increased $40 billion in the second quarter on an annualized basis to $232 billion. Personal loan balances increased for all risk tiers in the second half of last year, with the highest growth rates in the below-prime sector. 

Fintechs have increasingly introduced unsecured loans to meet the short-term credit needs of low- and moderate-income consumers since 2013, wrote the authors of the report, New York Fed Community Development Research Analyst Ambika Nair and St. Louis Fed Business Economist Eldar Beiseitov. 

In 2022, fintechs originated an average 1.9 million loans per quarter. According to the report, fintech originations fell to 1.14 million per quarter so far this year as they shifted to non-credit offerings such as cash-flow management and savings apps amid rising capital and cost-of-living expenses. Meanwhile, the share of loan originations by banks and credit unions has increased to more than 50 percent. 

“Fintech models for lending offer an important alternative to higher-cost traditional credit that is often inaccessible to low and moderate-income borrowers and less secure small-dollar loan options,” Nair and Beiseitov wrote. “An environment of lower interest rates allowed fintech firms to grow their businesses in the unsecured lending space, and the alternative data allowed them to efficiently target products to LMI borrowers. However, as inflation rose and interest rates tightened, delinquencies began to rise.”

Nair and Beiseitov said alternative data — cash-flow-based underwriting and the history of utility, telecom and rental payments — can extend credit access to low- and moderate-income consumers with minimal to no credit history.