Oct 31, 2019

The rise of debt consolidation

Felix Salmon, author of Edge
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Reproduced from TransUnion; Chart: Axios Visuals

New data from TransUnion suggests traditional banks might not be able to squeeze quite as much money from their credit card customers as they have in the past.

Background: For all the talk of banks being disrupted by nimbler digital competitors, it's generally impossible to see anywhere they've suffered so much as a flesh wound.

What's happening: Americans have $143 billion in unsecured personal loans — up 19% from 2018, with an astonishing 211% rise from the 2012 low of $46 billion, per TransUnion.

  • Most of those loans are debt consolidation, and most of the debt consolidation comes in the form of paying down credit card debt.
  • It's a fair assumption that the overwhelming majority of debt consolidation loans are originated online.

Why it matters: Banks have historically made it very difficult for customers to get unsecured personal loans, because they make much more money when those customers carry a balance on their credit cards instead.

  • Paying down credit card debt with a personal loan nearly always makes financial sense, but before the rise of online lenders, it was practically very difficult.
  • 68% of debt consolidators saw their credit scores rise after they took out the personal loan, per TransUnion. The rise in scores persisted for at least a year after the loans were taken out.

The other side: When it's easier to borrow money, people will borrow more money.

  • While borrowers who didn't consolidate their debt saw their total amount owed rise by $623 on average over one year, borrowers who consolidated ended up with $5,597 more overall debt than they had a year previously.
  • That's partly because a lot of people seem to consolidate their credit card debt exactly when they want to take out an auto loan.

The bottom line: Indebtedness is nothing to celebrate, but the most insidious debt trap of all is the one where your convenient payment device ends up costing you hundreds of dollars in interest every month. Anything that helps people cut down on expensive credit card debt is ultimately a good thing.

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