Covid-19 brought a wave of economic turmoil, including huge job loss numbers and financial hardship for millions of Americans. In a time when many people were—and still are—in dire need of financial assistance, you could reasonably expect personal loan debt to skyrocket.
Personal loan debt statistics, however, tell a different, more nuanced, story.
Forbes Advisor examined the changes in personal loan debt between 2019 and 2020 through public credit report data. These debt statistics show personal loan originations fell during the pandemic, and debt grew at a slower pace than it did in 2019.
Personal Loans During the Pandemic at a Glance
- monthly payment obligations.
Average Personal Loan Debt Per Consumer
Loan balances also increased in 2020, but just barely. The average loan balance increased by 1.2%—$199—per consumer between 2019 and 2020. You can reach this conclusion by looking at the percentage change in total outstanding debt (6%) and the total number of accounts (8%). If the number of accounts remained stable but the total outstanding debt increased, that would have resulted in a larger increase in the average loan balance.
While consumers opened 3.1 million new personal accounts in 2020, this was less than the number of accounts opened in 2019. In fact, new account openings, or personal loan originations—the process by which a borrower applies for a loan and a lender accepts their application—were down 26.5% in 2020 from 2019, according to a Credit Karma report.
Average Personal Loan Size
The average personal loan size also fell during the pandemic. By May 2020, just two months after Covid-19 was declared a pandemic, loan sizes began to trend down. In December 2020, the average loan size was $4,815, which is about a 20% decline—or $1,197—from January 2020, according to Credit Karma.
However, “there is a typical seasonal decline towards the end of the year in each year,” according to Credit Karma. “The decline could well enough be tied to this seasonal trend.”
While the drop-off in December loan sizes could have been a seasonal trend, the decline that began in May doesn’t seem to be so. It could have been due to lenders tightening their qualification requirements and the number of loans they were willing to originate.
Comparing May to June (the time period when the 2020 drop-off started) for both 2019 and 2020 gives a more accurate picture of the pandemic’s initial impact. In May 2019, the average loan size was $6,099, while in June 2019 it was $6,137—a $38 increase. Conversely, in May 2020 the average loan size was $6,509 while June 2020 was $6,117—a $390 decrease.
Common Personal Loan Uses
Given the slowing growth of personal loans, you may think the pandemic caused a shift in how consumers were using personal loans. That doesn’t seem to be the case.
Consolidating debt or refinancing credit card debt remained the primary reason for applying for a personal loan, just as it had prior to the start of the pandemic, according to Credit Karma. Borrowing for home improvement projects increased slightly after the beginning of the pandemic, which could be a reflection of more people starting remodeling projects while quarantined at home.
Credit Scores Among Personal Loan Holders
Although unrelated to overall personal loan debt, credit scores among personal loan holders give a snapshot of how lenders qualified loans. Lenders began to tighten their qualification requirements at the onset of the pandemic between March and April.
When the pandemic hit, people with personal credit scores between 600 and 659 saw the sharpest decline in approvals. What’s more, TransUnion data shows the average credit score of consumers with an open personal loan increased during Covid-19. As of December 2020, the average score was 643.
It’s obvious lenders are trending toward originating loans for those with higher credit scores, as higher scores are a sign of financial responsibility. Although it may not be impossible to get a personal loan with bad credit during the pandemic, as demonstrated by the average credit score of loan holders landing in the fair credit range, it is a bigger challenge than it was in December 2019.
Personal Loan vs. Other Debt
Americans changed their habits with other types of debt in 2020, as well.
Revolving credit is a financing you can reuse as you repay your balance, such as credit cards, personal lines of credit and home equity lines of credit (HELOCs). Non-revolving credit, on the other hand, is a lump sum amount of money that you repay in fixed monthly payments and can’t reuse once repaid. These accounts include auto loans and all other non-revolving loans, such as personal loans and loans for mobile homes, education, boats, trailers or vacations.
Revolving debt hit $974.9 billion in 2020, which is a 10.55%—$115.1 billion—decrease from $1.09 trillion in 2019, according to the Federal Reserve. Put succinctly, people began paying off their credit card debt in 2020.
On the other hand, non-revolving debt hit an all-time high of $3.20 trillion in 2020, up 3.9%—$120 billion—from 2019.
“While personal loans continue to be a great option for many customers, customers do have other options,” says Matt Lattman, vice president of personal loans at Discover. “For instance, many consumers who own a home and want to make upgrades have taken advantage of low mortgage rates and made use of home equity loans.”
How Will Personal Loans Change Moving Forward?
Personal loans are still common financing methods for people looking to access additional cash. While we can’t predict the future, trends indicate that personal loan debt will continue to grow in years to come. However, the economy will play a key role in how lenders originate these loans and the number of Americans who will need access to financing.
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