The hidden performance risk of prime credit tiers in an economic downturn

In the wake of the COVID-19 pandemic, lenders are looking to the past to determine the potential impact on their businesses. In the Great Recession from Q4 2007 to Q2 2009, personal loan lenders tightened their originations to reduce their exposure in an uncertain market. By the end of the recession the number of personal loan accounts across the credit risk tiers was just 11.4 million, a 10% decline from Q3 2007 — the last full quarter before the start of the recession.[1]

For a number of reasons, the personal loan landscape looks different now than it did from 2007 to 2009. First, personal loan distribution shifted to more prime and above borrowers in the aftermath of the Great Recession. As of Q3 2020, prime and above accounts represent 54% of personal loans, up from 40% in Q3 2007, right before the Great Recession began. Second, in the current crisis as of the end of Q3 2020, 4.38% of unsecured personal loans are in forbearance or deferment via hardship programs, obscuring performance data that was available in previous crises.[2]

Due to these factors, and consumers’ access to government assistance via the CARES Act, lenders may assume they are in a better position in this recession. This assumption, however, does not account for the impact of consumers migrating to different credit tiers during an economic downturn.

To understand the risks for FinTechs and other unsecured installment lenders, we analyzed TransUnion’s depersonalized consumer credit database to uncover trends from the Great Recession.


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