TransUnion: ‘Positive Growth’ to Drive Consumer Credit Market

TransUnion, Chicago, said low unemployment rates and continued positive growth in both GDP and real disposable income are among the key drivers that will propel the U.S. consumer credit market in 2019.

Partly due to the strong performance of these economic indicators, TransUnion’s 2019 consumer credit forecast found originations and consumer balances are expected to increase for most credit products, while serious delinquency rates will likely decline or remain steady.

“The consumer credit market has been buoyed by relatively strong macroeconomic factors this year, and our forecast sees more of the same in 2019,” said Matt Komos, vice president of research and consulting for TransUnion. “Consumer demand for both personal loans and auto loans is expected to remain high, and lenders are expected to continue looking to expand their books of business by providing more subprime and near prime borrowers with loans. This is a positive for both lenders and consumers.”

Komos noted delinquency rates remain at either low or “normal” levels, and lenders have confidence to open up their portfolios to slightly more risk. “From a consumer perspective, subprime and near prime borrowers accessing new credit will now have even more opportunity to showcase that they can responsibly manage their payments,” he said. “We anticipate the trend of managing risk exposure through loan amount and line management strategies for these higher risk consumers will continue into 2019.”

TransUnion noted outliers in the forecast come by way of serious credit card delinquency rates and originations as well as mortgage originations. Credit card delinquency rates are expected to rise from 1.94% in Q4 2018 to 2.04% in Q4 2019 as a shift toward more non-prime consumers with access to credit cards will likely negatively impact originations and consequently the serious delinquency rate.

TransUnion forecasted mortgage originations to drop as well. This latter forecast is based in part on increases expected for both the prime and mortgage interest rates, a rise in inflation and a low inventory of homes.

Komos noted much has been made of increased lending to subprime borrowers in recent quarters, but said more borrowers from this risk group have and will continue to gain access to loans in 2019.

“Everything is relative in consumer credit, and an increase in subprime borrowers should not be worrisome at this time,” Komos said. “Balancing risk and returns is an instrumental part of consumer lending, and small increases to delinquency rates are often part of the planning process–a normal derivative of granting wider access to credit. Even though it has now been a decade since the last recession, lenders continue to be cautious. In our estimation, the rise in non-prime borrowing we have observed and expect to see next year are a net-net positive.”

The report said the percentage of subprime borrowers originating loans still remains far below what was observed at the onset of the last recession. In 2007, the percentage of subprime borrowers originating loans for key credit products, included: 20% for auto; 25% for credit cards; 9% for mortgage; and 39% for unsecured personal loans.

TransUnion identified four trends for 2019:

Room for Growth in Personal Loans. Total balances are expected to climb 20% to an all-time high of 156.3 billion by the end of 2019. Even with growth expected in the subprime risk tier, overall serious delinquency rates are expected to drop 11 basis points in 2019 from the end of 2018 to finish next year at 3.39%. “This is primarily due to maintaining a healthy mix of prime consumers on the books as lenders extend credit to subprime consumers concurrently,” the report said.

Affordability Could Impact Auto Industry. Auto loan originations are expected to end 2018 at 28.5 million and grow to 29.4 million in 2019, a significant increase from recent years (27.5 million in 2017, 28.3 million in 2016, 28.0 million in 2015).

Homes Becoming More Expensive, but Home Equity Increases Could Be Boon to Consumers. Average balances will continue to trend upward in 2019, growing from an anticipated $208,831 at the end of Q4 of this year to $218,490 by the end of Q4 2019, a 4.6% increase. “While overall originations will be down in 2019, increases in home prices are resulting in record levels of home equity, which provide homeowners more opportunities to tap into low APR home equity products,” said Joe Mellman, senior vice president and TransUnion’s mortgage line of business leader. “This will particularly benefit consumers deciding pay off other higher interest rate products – as well as consumers finding it difficult to afford a new ‘move up’ house, who instead opt to invest in improving their existing home.”

More Near Prime Consumers will Carry a Credit Card. Near prime consumers are expected to increase their origination share to 19.1% in 2019, up from 18.3% in 2018. Total credit card balances are expected to rise 4% and finish 2019 at $840 billion.