Many Americans facing a financial crisis have a decision to make – which debts they will pay, and which they will skip.
When faced with that decision, consumers tend to prioritize unsecured personal loans ahead of other debts such as credit cards, auto loans and even mortgages, according to a new study conducted by TransUnion.
“It is quite surprising to us that, for most struggling consumers, unsecured personal loan payments are prioritized over other prominent credit products such as mortgages and auto loans,” said Ezra Becker, senior vice president and head of research for TransUnion’s financial services business unit. “While personal loans have existed for a long time, recent growth in the number of such loans led us to explore this product’s position along the payment spectrum.”
“The prioritization of personal loan payments above all others is counterintuitive, but our study results are clear,” Becker said. “We believe the relatively short duration of these loans, usually less than 30 months, is a key factor in the decision process of consumers.”
This chart shows delinquency rates after 12 months for consumers who possess and are current on all four credit products at the beginning of the respective performance measurement period.
TransUnion thinks the reason for the lower delinquency rates among personal loans could be because of the shorter time frame. Unsecured personal loans average 28 months, as opposed to an average 60 months for cars and 230 months for mortgages.
“We conjecture that personal loan borrowers may feel they can get a quick win with these loans even when they are struggling, and there is a clear, near-term end to the obligation, a light at the end of the tunnel, in a sense,” Becker said.
“In contrast, auto loans and mortgages have much longer terms, and credit cards have no set end date,” he said. “Finding an opportunity to pay a debt in full can be a powerful motivator for a struggling consumer.”
The chart above shows while mortgage delinquency rates still linger behind autos and personal loans, they now surpassed credit cards as a priority for borrowers.