Study: Consumers Prioritize Personal Loan Payments Over Other Debts

5/19/2017 10:00 AM

TransUnion finds in recent years consumers focus more on completing payments on shorter-term personal loans rather than mortgages and credit cards.


When faced with the decision of which debts to pay, consumers prioritize payments on unsecured personal loans over mortgages, auto loans and credit cards, according to a new study from 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 in a news release. “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. Finding an opportunity to pay a debt in full can be a powerful motivator for a struggling consumer.”

Becker added, “We believe the relatively short duration of these loans—usually less than 30 months—is a key factor in the decision process of consumers.”

From 2009 through 2015, TransUnion observed yearly credit performance for consumers who possessed at least one active auto loan, credit card, mortgage and unsecured personal loan, and were current at time of study selection, according to the news release.

And, additional data from TransUnion show that while unsecured personal loans originated in the fourth quarter of 2016 had an average term of 28 months, the average term for auto loans was 60 months and 230 months for mortgages.

Before TransUnion studied payment trends for unsecured personal loans, consumers prioritized payments on their auto loans more than mortgages and credit cards.

“Since at least 2004, consumers with an auto loan, credit card and mortgage have prioritized their auto payments. Mortgages have traditionally been the second payment made, followed by credit cards,” according to the news release.

Payment trends changed during the Great Recession and in third quarter 2008 consumers started paying their credit card bills before mortgages.

“As housing values began crashing in 2007 and 2008, many homeowners found themselves ‘underwater’ on their mortgages, meaning they owed more on their mortgages than the value of their homes,” said Nidhi Verma, senior director of research and consulting in TransUnion’s financial services business unit in the news release. “With unemployment sharply rising, a lot of these borrowers began to emphasize their credit card payments, protecting their liquidity as a vehicle to pay their bills or simply to put food on the table.”

The trend reverted to the “historical norm” in the first quarter 2014.

“The payment hierarchy is complex—the decision process for struggling borrowers is a difficult one. We confirmed through our study that both the strength of the labor market and housing values continue to be critical drivers of that decision process,” Becker said.

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