Roughly 22.7 million American borrowers had an outstanding unsecured personal loan at the end of June 2023, with loans from financial technology firms a significant driver of new unsecured loans, the Federal Reserve Bank of New York said in a report released today. Unsecured personal loan balances reached $232 billion by 2023, up $40 billion from 2022 and $86 billion from 2021, “indicating a significant market need for this type of credit,” according to the report.
The amount of loans originated for below-prime borrowers increased in each of the three years studied. Fintech firms accounted for nearly 38% of unsecured loans in the second quarter of 2022, with low interest rates and fintech’s use of alternative methods of creditworthiness driving growth in originations. However, that figure dropped to 26.5% in the second quarter of 2023, when banks and credit unions accounted for more than half of unsecured loans. “An environment of lower interest rates allowed fintech firms to grow their businesses in the unsecured lending space, and the use of alternative data allowed them to efficiently target products to LMI [low- to moderate-income] borrowers,” the report’s authors said. “However, as inflation rose and interest rates tightened, delinquencies began to rise in this space.”
Many fintech firms are now shifting to non-credit offerings for LMI borrowers, such as cash-flow management and savings apps, the authors said. “Fintech firms will continue to be tested in their ability to consistently provide LMI borrowers with an alternative credit option, particularly in economic environments that are difficult for LMI borrowers to navigate,” they added.