Credit cards and installment loans are consumer loan products, but their purposes and terms vary. Credit cards provide consumers with a transaction or loan feature that allows cardholders to withdraw funds on a revolving basis within a prescribed line of credit. Payments vary based on the outstanding invoiced balance, typically around 1/36 of the amount due plus assessed interest. The good news about the minimum due is that it is relatively low.
The bad news is that if you only pay the minimum due, a balance of $3,000 will take 11 years to pay off and the cost of financing would be around $1,745. On the other hand, if you had to repay a little more than the estimated minimum amount of $90 due, say $103, the repayment would be made in three years. Spoiler alert: never pay the minimum due.
Now consider the installment loan. With this lending vehicle, you will typically receive the funds at closing and, on an agreed upon schedule, repay the loan. You will not have the ability to obtain additional funds, as you would with a credit card, unless you refinance or renew the loan, or obtain another loan elsewhere. Installment lending was something of a dormant business for banks, but with the emergence of BNPL, bankers need to think about how consumer preferences might change over the decade. Sure, you can lease a car without an installment loan, but if you want to buy a boat or consolidate all those credit card bills you’ve been racking up, an installment loan might be a good option.
Figures recently published by Trans Union, a leading credit bureau, indicate that installment loans are growing rapidly. While not seeing the 124.2% year-over-year increase that bank cards enjoyed as the industry rebuilt from the COVID lows, personal loans did rise 69.9% year-on-year. In addition, balances increased by 5.6%, while bank card balance growth only increased by 0.5%.
Figures from TransUnion show that banks and credit unions supply 81% of credit card products, with 19% from financial companies, fintechs and others. In contrast, banks and credit unions only have a 58% share of personal loan volume. Considering how financial institutions have been blindsided by the adoption of BNPL, it may be time to examine the potential of installment loans in the loan mix of financial institutions.
Learn more about installment loans this month as we unveil our view of the installment loan market and how it can impact your loan books.
Preview by Brian RileyDirector, Credit Advisory Services at Mercator Advisory Group