Impact of Inflation: Unsecured Loans and Credit Card Spending Rise — What Are the Risks?

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Both increased significantly after credit card spending and unsecured personal loans slowed during the COVID-19 pandemic. bank card balance The US hit a record high in the third quarter of 2022, according to the company. new report From Transunion. Meanwhile, unsecured personal loans have seen record growth in both originations and balances.

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transunion’s Credit Industry Insights Report for Q3 2022Released Nov. 8, the increase was largely driven by the growth of Gen Z and Millennial borrowers, whose balances increased by 72% and 32%, respectively.

In a press release, TransUnion said record growth in unsecured personal loans (loans not backed by collateral) was also due in part to a significant increase in lending to prime and below risk tiers. This increase, combined with a general deterioration in the financial health of subprime consumers due to inflation spikes, led to a similar increase in delinquencies, now exceeding pre-pandemic levels.

“Inflation likely played a role in the increase in demand for personal loans in the first half of this year,” said Salman Chand, vice president of consumer finance. TransUnion told GOBankingRates in an email. But the first half of the year also saw a very strong willingness/ability of lenders to originate more loans. This may be due to the increased availability of capital that the lender wanted or needed to deploy during that period. ”

TransUnion found that the number of consumers with access to personal loans increased to 22 million in Q3 2022, up from 19.2 million a year earlier. Average personal loan debt per borrower rose from $9,387 to $10,749. Average credit card debt per borrower also surged from $4,857 in Q3 2021 to $5,474 in Q3 2022.

Unsecured personal loans offer a way for people to pay for expenses when cash is tight, but they also come with risks. Unsecured loans usually have higher interest rates than secured loans. In some cases, interest rates can be significantly higher and repayment difficult.

With an unsecured loan, you don’t have to worry about losing collateral. But as Experian points out on his website, late payments can have cascading effects that can cause significant credit and financial damage.

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If your unsecured loan defaults, your credit score According to LendingTree, defaults can remain on your credit report for up to seven years. This can make it difficult to obtain future loans. You may also face rent reductions, lawsuits and liens on your property from the lender.

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This article originally appeared on Impact of Inflation: Unsecured Loans and Credit Card Spending Rise — What Are the Risks?

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