Growth of Personal Loan Debt Slows Amid Pandemic

Growth of Personal Loan Debt Slows Amid Pandemic article image.

With the economic pressure brought on by the COVID-19 pandemic, 2020 was widely expected to be a year where consumer borrowing would undergo historic change. And while the country faced record unemployment and many Americans struggled financially, borrowing habits—as shown in credit report data—have largely remained stable.

There were a few notable exceptions, however. Personal loan debt, which for several years has been the fastest-growing debt category, saw the biggest change in 2020. The annual growth in personal loan borrowing was cut nearly in half, from 12% in 2019 to 6% in 2020. Amid this overall slowing, Generation Z (the youngest generation in our analysis) grew their average personal loan balance by 33% in 2020.

As part of our ongoing research on debt in the U.S., Experian reviewed credit report data to see how personal loan debt changed in the past year and to understand what impact the pandemic has had on borrowing. This analysis compares annually representative data from 2019 with data from the third quarter (Q3) of 2020, the most recent information available.

Read on for our insights and analysis.

Experian 2020 Consumer Credit Review

Overall Personal Loan Debt in the U.S. Grew in 2020

Though the nation's outstanding personal loan debt grew in 2020, the rate at which the balances expanded was cut in half—shrinking from 12% growth in 2019 to just 6% in 2020, according to Experian data. This slowing marks a deviation from a six-year-long trend that saw personal loans become the fastest-growing type of consumer debt in the country. As of 2020, however, student loan and mortgage balances grew at a rate faster than personal loans, increasing by 24% and 7%, respectively.

Beginning in 2009—on the heels of the Great Recession—personal loan balances began to shrink and continued to do so until 2014. This period of decline resulted in overall personal loan debt falling from $259 billion in 2008 to $171 billion in 2013. Outstanding personal loan balances began to rebound in 2014, and personal loans became one of the fastest-growing debt categories leading up to 2020.

In Q3 2020, overall personal loan debt reached a new all-time high of $323 billion. This represented a 6%—$18 billion—increase from $305 billion in 2019. Despite the growing balances, personal loan debt still represents only 2% of overall debt in the U.S., ahead of only retail credit cards in terms of total balance. Some consumers also opt to use balance transfer credit cards to payoff personal loans.

Snapshot: Total Personal Loan Debt
Avg. personal loan balance$16,259$16,458+$199 (+1.2%)
Total outstanding debt$305 billion$323 billion+$18 billion (6%)
Total number of accounts39.6 million42.7 million+3.1 million (8%)

Source: Experian

Average Consumer Snapshot: Personal Loan Balances

Though overall personal loan debt saw growth in 2020—in continuation of the six-year trend—the average amount each consumer owes only increased by only 1%, according to Experian data.

As of Q3 2020, consumers owed an average of $16,458 in personal loans, up $199 from $16,259 in 2019. This year's increase in individual average personal loan debt comes on the heels of several years in which average consumer balances went down. In 2018 and 2019, average personal loan balances per consumer shrank by 1% and 0.5%, respectively—a decline that occurred while overall personal loan debt increased.

The contrast between overall growth and declining individual balances is likely explained by the increasing number of personal loan accounts, which has been the trend since 2013, according to Experian data. With more accounts, overall debt balance can grow while the average balance remains about the same. Since 2013, the total number of personal loan accounts has grown 90%, from 22 million to 43 million in Q3 2020.

Personal Loan Debt Increases in Some States, Falls Elsewhere

Across the U.S., the country was split when it came to how consumers' average personal loan debt changed in the past year. Consumers in 27 states saw their balances grow in 2020, while personal loan debt balances fell in the remaining 23 states and the District of Columbia.

Among the states where consumers' balances increased, nearly two-thirds—17 states—saw amounts owed grow by 4% or more. Two states saw double-digit percentage growth.

Of the states where consumer balances decreased, a little over half—16 states—saw a decrease of less than 4% and only two saw double-digit percentage declines. Notably, in the 10 states that saw balances drop the most, consumers' average FICO® Scores were consistently above the national average of 710—a potential nod to the ability higher-score holders had in paying down debt over the past year.

Average Personal Loan Debt by State
State20192020% Change
District of Columbia$12,932$10,400-19.6%
New Hampshire$18,147$17,798-1.9%
New Jersey$15,350$13,879-9.6%
New Mexico$16,907$17,892+5.8%
New York$15,069$14,383-4.6%
North Carolina$16,402$15,869-3.2%
North Dakota$26,342$24,808-5.8%
Rhode Island$14,488$13,925-3.9%
South Carolina$14,575$15,272+4.8%
South Dakota$26,137$25,174-3.7%
West Virginia$17,442$17,091-2%

Source: Experian

Nearly half of all states and the District of Columbia saw their average personal loan balance drop in 2020. The nation's capital saw the biggest drop by far, nearly doubling the decrease seen in the second-ranked state—New Jersey. Vermont, Connecticut and North Dakota followed closely behind New Jersey to round out the states with the top five biggest decreases in debt.

Consumers in the District of Columbia decreased their average balance by 19.6% since 2019, according to Experian data. This reduction is in line with other trends within the district. In 2020, consumers there also saw their credit card debt drop by 20%—the most of any state.

States With Largest Drop in Personal Loan Debt
District of Columbia$12,932$10,400-19.6%
New Jersey$15,350$13,879-9.6%
North Dakota$26,342$24,808-5.8%

Source: Experian

Consumers in more than half of states—27 to be exact—saw average personal loan balances increase since 2019. The greatest increase was recorded in Kentucky, where consumers saw their average personal loan balance spike by 11%. Nebraska, Nevada, Maine and Wyoming followed Kentucky as the states where consumer balances saw the greatest growth in 2020.

States With Largest Growth in Personal Loan Debt

Source: Experian

Younger Generations Drove Changes in Personal Loan Debt

Since the time personal loan debt began to increase in 2014, the composition of lenders issuing the debt has changed. In 2015, only 22% of unsecured personal loans were issued by fintech lenders (online-based technology companies), with traditional financial institutions (including brick-and-mortar banks and credit unions) accounting for the rest. That figure more than doubled by 2019, when fintech lenders accounted for 49.4% of new originations, according to an Experian report.

The growing popularity of fintech lenders has many implications, one of which is the inclusion of younger Americans in the borrowing pool. Among personal loans issued by traditional banks, only 28% were taken out by millennials and members of Generation Z, according to Experian. Meanwhile, 39.9% were issued by fintech lenders, a sign of the shifting digital landscape and younger generations' affinity for fintech solutions.

In terms of how much is being borrowed, members of Generation Z saw their personal loan balances grow the most of any age group in 2020. These consumers increased their personal loan balances by 33%, or $1,478, on average. Though millennials saw a fraction of the growth in their debt—millennials' average balance increased by just 4%—the second-youngest generation still recorded the second-highest spike in 2020.

Change in Average Personal Loan Debt by Generation
Generation Z (18-23)$4,526$6,004+33%
Millennials (24-39)$11,819$12,306+4%
Generation X (40-55)$17,175$17,733+3%
Baby boomers (56-74)$19,253$19,700+2%
Silent generation (75+)$17,112$17,123+0%

Source: Experian; Ages as of 2020

The growth in personal loans among younger generations can't all be traced to the increased popularity of fintech lenders, though. As time's gone on, many of these consumers have reached an age where taking out a personal loan is more common. Additionally, as these consumers age, their average credit scores generally increase—opening the doors to new borrowing opportunities. The confluence of these factors is likely what's driving the significant debt growth among younger Americans.

At the same time, the opposite pattern is appearing across the oldest generations. Baby boomers have the highest personal loan balances of any group, but they are growing this debt at the second slowest rate. The silent generation saw virtually no balance change from 2019 to 2020, as many members of the generation are retired and in the process of paring their debt down as they age by paying off mortgages, for example.

Personal Loan Delinquencies Decreased in 2020

As the pandemic took hold and the economy began to slump, many worried that consumers would fall behind on their debt payments. During the Great Recession that began in 2007, delinquencies grew to record highs, and the impact of falling behind left a lasting stain on the economy and individuals' finances.

In an effort to minimize widespread delinquency and other economic repercussions caused by the pandemic, Congress and other institutions took preemptive measures by issuing relief measures—including legislation in the form of the Coronavirus Aid, Relief and Economic Security (CARES) Act—that gave borrowers options to help them avoid letting their accounts become delinquent.

Paired with other factors, these measures have seemingly proved effective thus far—at least in part—as credit report data show that across nearly all debts and time periods, consumers have improved their delinquency rates since 2019.

Personal loan delinquency rates saw significant improvement in the past year, decreasing by double-digit percentages across measures of delinquency. The ratio of personal loan accounts severely delinquent—90 to 180 days past due (DPD)—shrank by 35% from 1.37% to 0.89% between 2019 and Q3 2020, according to Experian data. The portion of accounts 30 to 59 DPD reduced by 24% and accounts 60 to 89 DPD shrank by 17%.

Snapshot: Personal Loan Delinquency in the U.S.
Average % of accounts 30-59 DPD1.46%1.11%-24%
Average % of accounts 60-89 DPD0.78%0.65%-17%
Average % of accounts 90-180 DPD1.37%0.89%-35%

Source: Experian

Personal loans were not the only credit type to see a decrease in delinquencies. In fact, across the U.S., the ratio of all delinquent accounts shrank between 2019 and 2020, and this pattern of decline was true for all debt types, according to Experian data.

The reasons behind improvements for student loan and mortgage are fairly clear: The CARES Act not only suspended student loan repayment, but it issued guidance for mortgage lenders, allowing many consumers financially impacted by the pandemic to place their home loans in forbearance.

The explanation for the decrease in personal loan delinquency is more opaque, however. While the federal government urged lenders to work with borrowers who were struggling due to the pandemic, there was no clear mandate for personal loans and other debts. It's unclear to what extent personal loan issuers worked with consumers financially impacted by the pandemic, but there is a possibility that at least some of the improved delinquency rates can be attributable to lender accommodations such as lowered monthly payments.

How Did COVID-19 Impact Personal Loans in 2020?

The COVID-19 pandemic has clearly impacted the way consumers interact with personal loans, both negatively and positively. Borrowers still seem to be turning to these lump-sum payment options, but overall debt is growing at half the rate it did in past years.

To understand more about how COVID-19 impacted consumers' decision to take a personal loan, Experian surveyed a group of 186 Americans who had taken a personal loan in the past 12 months.

Of this group, only 26% said they took the loan because of direct financial hardship from COVID-19. Another 24% said the pandemic had some influence on their decision to take a new loan, but was not the entire reason for their doing so.

The vast majority of those surveyed said they were confident in their ability to pay back their debt. A total of 86% of respondents said they can afford the monthly payment on their personal loan, according to the survey. The remaining 14% did not say they could afford their monthly payment.

Finally, the pandemic hasn't only changed the ways borrowers think about taking out debt, but it's changed how some lenders view applicants. According to media reports, the pandemic's economic impact has caused some lenders to reign in the number of loans they issued. Any reduction in lending that occurred could have contributed to the slowing overall debt growth.

Even if consumers had maintained—or even increased—their appetite for personal loans during the pandemic, with a reduction in borrowing opportunities, debt growth is bound to slow.

Credit and Debt Trends in Changing Times

Though initial debt data shows promising changes—including the slowed debt growth and an improved delinquency rate—it's important to recognize that this data is a snapshot taken during a turbulent period. Additionally, most of these changes occurred over a period of less than a year and are subject to further change as time goes on.

This analysis looks at the most recent (upon date of publication) data from Q3 2020 and compares it with an annual snapshot for 2019 and other years cited. As time goes on, we will continue to monitor changes to consumer credit reports and will provide updates when notable change occurs.

Methodology: The analysis results provided are based on an Experian-created statistically relevant aggregate sampling of our consumer credit database that may include use of the FICO® Score 8 version. Different sampling parameters may generate different findings compared with other similar analysis. Analyzed credit data did not contain personal identification information. Metro areas group counties and cities into specific geographic areas for population censuses and compilations of related statistical data.

FICO® is a registered trademark of Fair Isaac Corporation in the U.S. and other countries.

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