The year 2020 has been considered by many as a year of unknowns. For the everyday consumers, marketers, and financial institutions, 2020 has presented tons of unprecedented challenges. And as we enter 2022, which offers the much-awaited return to normalcy, it looks like there is no such thing as predictions these days that is too crazy, straight-out-of–dystopian-fiction-novels, or bold.
What we know is that two years ago, consumer lending turned on its head. The issues in people’s expectations and lifestyles we have witnessed could reshape the industry for many years to come. So, what will 2022 look like for both borrowers and lenders after two years of uncertainties and unknowns? Let us take a closer look at some trends we have seen over the past couple of years to understand the industry of where we are headed.
Deposits from banking institutions grew twice the rate of debentures this year
Over the first and second quarters of 2020, total deposits from banking institutions grew more or less 25%. That is a full 600% more than the yearly growth rate from 2016 to 2019. Total debenture growth saw an increase as well. This increase is powered by PPP or Paycheck Protection Program and refinancing loans. But it’s just 15%, it could not keep up with the pace of deposits.
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And without these loans, growth could have been below the red line. For lending organizations, annualizing the first and second quarters of 2020, total median lending institution deposits increased by 22%. That is ten times higher compared to the median deposits from 2016 to 2019 yearly growth rates, while credit growth dropped 4% over the same time.
It marks a sizable and sudden shift in financial organization balance sheets. There is now a more profound need for credits. But in markets where qualified debenture demands are on the decline, it is a challenging task – especially for organizations with limited marketing resources when it comes to cost-saving budgets.
Low-interest rates are driving a change toward refinancing
With the thirty-year fixed credit rate reaching an all-time low – probably the lowest ever recorded since 1971 – the public realizes it makes a lot of sense to refinance. Especially at times when finances are tight for a lot of households, individuals do not want to overpay in interest rates if they do not have to.
Longer terms also let people put more funds back in their accounts today, providing them with a lot of flexibility to ride out difficult times or make overdue house improvements with work-from-home shifts. And consumers are now looking for products to help them refinance their loans.
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While the lending industry surged, consumer loans sank
As small and startup businesses use PPP or Paycheck Protection Program debentures, industrial and commercial credits have seen a 45% growth during the pandemic. But this trend could not be more opposite to the public – with a hard retraction in consumer debentures and credit cards.
As a matter of fact, auto and housing debentures have been the only lifelines of progress for consumer credit portfolios – they increased a modest 1.5% and 0.8%, respectively. But these gains are not enough to offset losses of credit cards, home equity, and other personal lines of credit or loans.
New clients are originating more credits than ever
Credit unions and banking institutions are not just competing with each other anymore. It is not a new movement. It is a long-time reality that is only increasing with today’s digital transformation. Non-bank lending firms first overtook credit unions and traditional banks with at least 50% market share back in 2016.
The rise in competition from fintech startups to big techs to nontraditional lenders is saturating an already narrowing industry for credit unions and traditional banks to find profitable new debentures. And a lot of these new companies are more experienced when it comes to navigating the digital-first way of doing things that all institutions have been forced to embrace during the COVID-19 pandemic.
The road ahead: Lending predictions for 2922
Refinancing is estimated to drop by at least 45%
Yes, it is still an excellent time for the public to do refinancing. But the current trend we have seen during the COVID-19 pandemic is unsustainable. At this point, most rate shoppers who are looking for a sustainable refinancing option have already refinanced.
That leaves people who are not currently planning or thinking about this option or necessarily paying a lot of attention to the rating industry. Refinancing could make a lot of sense for most consumers; it will no longer be low-hanging fruit. The MBA or Mortgage Banks Association is also expecting 30-year fixed-rate credits to increase (3.3%) this year – it was up 3% in 2020 – in which case they predicted refinance debenture originations would dip more than 45% next year.
Credit cards and consumer debentures can expect slower recoveries
Outside of immediate government injections of funds –Economic Impact Payments – growth should be stable, steady, but a lot slower compared to previous years. If there is a market recovery, both credit card lending and consumer debentures should choose to back up – but not necessarily at the same interest rate debts are paid off.
The flip side of new stimulus packages would be the reduction of CC debts (as what happened on the 2020 stimulus package). Although we have already seen a significant rebound in job markets since March 2021, the overall change in job employment is still lower compared to the change in employment from the 2007 to 2009 recession. And after the initial hiring spike, the curve starts to level or plateau.
Qualified borrowers are hard to come by
Given today’s situation of economies, while demand for these debentures should stay high, the quality of qualified consumer credits might be pretty low. There has been a lot of job rotation with a cycle of shutdowns and opening this year – a trend that could still continue at least until Coronavirus-19 vaccines are fully distributed.
Because of this, job verification services will be more vital than ever to mitigate risks and bring ineligible borrowers. And companies can expect that there will be elevated amounts of debentures in hardship among affected clients, prohibiting a stimulus package.