Installment credit: Everything old is new again

BNPL is not the only lending instrument to be revived from the annals of banking. This time it is installment loans. Just as “buy now, pay later” reshaped the legacy models of GE Credit and Household Finance, installment loans are experiencing a renaissance. Installment credit was the only game in town until credit cards became the credit and loan product of choice in the 1980s.

The WSJ reports.

“Lenders are looking to rebuild their loan books that were devastated during Covid.” At Citigroup Inc., U.S. personal and other unsecured consumer loan balances rose 75% in the first quarter of 2022 from the same period last year.

Wells Fargo & Co. originated $798 million in new personal loans in the fourth quarter of 2021, compared to $294 million in the prior year and $708 million in 2019. SoFi reported a record 1, $6 billion in personal loans originated $614 million and $801 million, respectively.

Installment loans tend to be cheaper for consumers but are structured differently than revolving loans. According to the Federal Reserve, the average personal lending rate for a 24-month installment loan in February 2022 was 9.41% versus 16.17% for a credit card

Credit cards require lenders to be willing for the consumer to use some or all of their line of credit, although people typically only use 25% of their line of credit. These operational costs, along with the risk of fraud at the point of sale and slightly higher loan loss rates, drive up the cost of revolving credit.

With a credit card, the consumer can balance his budget. You may need access to credit for a month and then quickly pay off. Installment loans fit well on a budget, but they’re usually for expedient events like consolidating credit card debt, paying for a vacation, or a family event.

In a recent Mercator report, we found that fintechs have supplanted financial institutions as the leading lender group for consumer loans. Like BNPL, the fintech revival positions a legacy product as “new and improved.”

It’s an opportune time for traditional lenders to rethink installment lending. That’s what top banks are doing, and as interest rates rise, there should be plenty of lending opportunities to help rebuild loan books.

When the industry looks for revival, my lending policy favors deposit lending, something Fiserv has newly created. It’s like a savings account loan from days gone by. Borrow money and secure it with your savings account. That’s just as good as borrowing money from yourself or using a $401,000 loan to finance your next car. Little or no credit risk and the ultimate in low cost lending.

overview after Brian RileyDirector, Credit Advisory Service at Mercator Advisory Group

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