Research & Commentary

It’s a Wonderful Life (Before Deflation)

Credit has never been easier to come by. Watch out for deflation.

According to credit bureau TransUnion, personal loans in the U.S. rose 18% in the first quarter of 2018 to $120 billion. The main conduit for the increase has come from so-called FinTech companies — firms that conduct borrowing and lending operations without the banking sector, making full use of technology. (Want a fast loan, no questions asked? Just click the button.) According to TransUnion, FinTech companies originated 36% of personal loans in 2017. That’s up from less than 1% in 2010. The frenzy for debt has seen tremendous growth in alternative finance vehicles, creating new companies such as LendingClub, Social Finance Inc and Marketplace Inc. We find it curious that, despite this growth, an investment in LendingClub since launch has, as the chart below shows, been an unmitigated disaster. Something doesn’t add up.

The surge in FinTech-related personal loan growth is worrying because it reflects a laissez-faire attitude to debt often seen around the top of credit cycles. Personal loans are seen as attractive to borrowers because they are unsecured. A typical example is a couple who, according to a Bloomberg article, borrowed $10,000 via LendingClub because they did not want to put their house or car up as collateral. The price for doing that? A 23% interest rate! That’s credit card rates. It may be that Americans are now so maxed-out on credit cards that Fintech personal loans have added yet another layer of debt. The Federal Reserve Bank of New York’s data reveals that total household debt in the U.S. hit a new peak in the first quarter at $13.21 trillion ($13,210,000,000,000).

“A lot of credit goes to the FinTech lenders for reinvigorating a loan category that’s been around forever,” TransUnion’s consumer-lending business lead, told Bloomberg. “If you think about ‘It’s a Wonderful Life,’ George Bailey and his bank offered personal loans to the consumers. It’s a core banking product that’s been around since the beginning of banking.”

The problem is, as that movie so powerfully demonstrates, credit lines have a habit of seizing up. When that happens, credit deflation takes hold.

 

 

 

 

 

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