Country Risk Climate: TransUnion (NYSE: TRU) confirmed that consumer credit activity keeps rising from the COVID-19 pandemic lows, but some areas like automobile loans (subprime) performance have lagged.
As noted in an update published on February 18, 2021, by TransUnion, the company’s Q4 2020 Industry Insights report looks into the recent consumer credit trends.
Consumer credit activity began to pick up during the final quarter of 2020 as balances started to increase across most credit products and originations activity recovered from the lows seen during the early stages of the pandemic, TransUnion revealed.
TransUnion’s Q4 2020 report also noted that subprime borrowers have generally been following the overall market trend, although this particular group’s activity has “decelerated in the auto lending industry.”
Matt Komos, VP of Research and Consulting at TransUnion, stated: “On the surface, the consumer credit market is performing quite well. Serious delinquency levels remain near record lows while balance and origination activity is picking up. Additional stimulus and flattening unemployment rates point to a continuation of this trend. However, the performance of those accounts still in accommodation will help shape the true consumer credit picture. With many accounts expected to come out of accommodation between March and May, most notably mortgage accounts, we will soon see the true impact of those programs for both consumers and the credit marketplace.”
Although originations (measured one quarter in arrears) surged higher in the mortgage sector (increasing 67% between Q3 2020 and Q3 2019), this performance is an “outlier” in the consumer credit market, the report added.
The report also mentioned that low-interest rates and “greater housing demand” have managed to disproportionately “propel” mortgage demand. But originations activity for credit cards and personal loans have declined by around 30% during the past year. For credit cards and personal loans, the “lag in subprime borrowing has mirrored the overall market,” the TransUnion report revealed.
The report further noted that car loans have “experienced a different phenomenon in which overall originations in Q3 2020 have nearly recovered to Q3 2019 levels, though originations to subprime auto loan borrowers are lagging – down about 21%.”
“A tightening in auto lending standards would generally be the primary reason for such a precipitous drop in subprime origination activity. We’ve conducted further analysis that demonstrates that, in this case, it could be a combination of lagging consumer demand and adjustments in lending criteria. This revelation points to the outsized economic impacts some subprime borrowers are feeling as a result of COVID-19.”
The report added that unsecured personal loan lenders remain fairly cautious as originations in Q3 2020 were 30.7% lower than the previous year, but managed to grow “strongly quarter-over-quarter, indicating a gradual ramp-up in volume.”
The report further noted:
“Serious delinquency rates increased slightly by 15 basis points (bps) in Q4 2020 on a quarterly basis, though remained 78 bps lower than Q4 2019. The relatively low level of lending resulted in balances falling again in Q4 2020 to $148B, and consumers with balances totaling 19.2M – a 7.8% and 7.3% drop versus prior year, respectively. Continued availability of lender hardship programs, in addition to eviction moratoriums and decreased consumer spending, helped keep delinquencies and new charge-off balances low.”
(View the full report here.)