What does a healthy loan portfolio look like? Much like financial advisors counsel investors to diversify their personal investments, banks and credit unions must follow the same advice. Relying too heavily on one loan product puts the institution at risk and leaves valuable growth opportunities for someone else to grab.
With rising interest rates likely to result in a decline in mortgage origination and refis this year, according to estimates released by the Mortgage Bankers Association (MBA), lenders are wise to expand other lines of lending to offset this decline.
According to TransUnion, personal loans are expected to continue to perform well as the popularity of these products continues to rise among prime consumers. “Since Q3 2013, the number of consumers with personal loans has grown 18 percent from 23.07 million to 27.34 million as of Q3 2015 (latest data available), representing total balances of $82.52 billion in unsecured loans and $165.46 billion in secured loans,” the company said in a press release, adding:
“Unsecured loans have experienced growing popularity in the last several years. As of Q3 2015 (the latest data available), 13.72 million consumers had an unsecured personal loan balance. Growth in unsecured loans is largely attributed to the prime and better risk tiers, i.e., those with a VantageScore® 3.0 credit score higher than 661. In Q3 2015, 6.46 million consumers in the prime or better risk tiers had an unsecured loan balance, a growth of more than 2 million additional consumers from Q3 2012 (4.43 million).”
Why personal loans are becoming so attractive to consumers
Prior to the housing crash, home values were rising rapidly and interest rates were falling. Cash out refinance loans were an easy way for consumers to get extra cash. Today, the refinance business has fallen by nearly 30 percent of what it was just last year, according to the MBA, and the cash out refi business is all but gone.
However, consumers still need capital to fund their needs, and one of the easiest ways to do that is with personal loans, which are seen as a relatively simple way to get funds fast. In fact, consumers are finding credit card interest rates, which now average 15.7 percent, according to CNBC, can’t compete with the rates for personal loans, which average 11.3 percent but can go as low as 5.5 percent for borrowers with very good credit.
Personal loans also offer the stability of a set monthly payment and concrete payoff date, where credit cards often turn into a revolving door of minimum payments and a principal balance that never seems to shrink. Consumers also like the speed of a personal loan, with some lenders being able to disperse funds in as few as 48 hours following the application.
Expanding your lending line of business
If the thought of launching a new line of business or expanding an existing line to increase profitability sounds like a major task, consider that much of the work involved in writing these loans can be offset by the having the right document provider.
Docutech’s ConformX dynamic document generation engine provides a template agreement for unsecured personal/consumer loans for use by state licensed lenders in all 50 states, customizable for your specific use. To learn more about how Docutech can serve you in consumer lending as well as home equity products, download our solution brief below.