It’s the end of the quarter and, as always, we at TrueAccord are looking at consumer debt trends that will impact our industry and beyond. The four key trends we’re studying are: resumed foreclosure activity, extensive medical bills, the end of child tax credits and historically high inflation. Add these all together and the financial outlook for consumers, especially those in debt, is scary.

But there are silver linings, as well. For one, the consumer credit market is looking strong with signs of expansion, specifically,  originations for credit cards and personal loans are increasing. Second, the fintech industry continues to grow and evolve to meet the changing needs of consumers, offering more opportunities for financial inclusion and innovative customer experiences.

The Downside

Look, coming out of a pandemic and into a tumultuous international economic situation, we don’t expect it to be easy. But some definitely feel it more than others. For many families, government stimulus through child tax credits (which ended in December) was helpful in covering the gaps in income from pandemic losses, but it wasn’t enough to prepare them to take on new expenses and restart all the financial obligations that were temporarily on hold. In fact, a recent report from the Columbia University Center on Poverty & Social Policy found that 3.7 million U.S. children were plunged back into poverty by the end of January when child tax credits expired, indicating that the stimulus was making a significant financial difference for many families.

In January, the foreclosure proceedings that were paused under the CARES Act resumed after an 18-month hiatus. In January alone this amounted to 56,000 foreclosure starts, up 29% from the month prior. But that doesn’t tell the whole story: 964,464 mortgages are still seriously delinquent and not in forbearance, with 49% in loss mitigation plans. Even more concerning, of those 474,071 borrowers in loss mitigation, 72% just aren’t paying.

The average American household is now paying an additional $276 per month on expenses thanks to record-high inflation. And don’t forget pandemic-related medical expenses from Covid-19 testing and treatment. A recent survey found that 56% of Americans, with or without insurance, owe health-related debt, and almost one in six people with medical bills aren’t paying them off.

And it’s not just medical bills. According to Experian’s latest Ascend Market Insights, February marked the 9th month in a row with increasing 30+ delinquency rates on a unit basis across debt types. Their data shows that 30+ day past due accounts showed a 7.59% increase month over month with notable delinquency increases in first mortgages, second mortgage, auto leases and unsecured personal loans. Additionally, month over month views of roll rates show 0.91% of consumer accounts were rolling into higher stages of delinquency in February 2022. This indicator has now returned to the same level as the start of the pandemic in March 2020. 

While student loan payments are still paused through May, the day is quickly approaching when many will see their financial obligations increase yet again, compounding the burden and financial pressure on consumers.

The Upside

In spite of the challenging economic landscape, the good news is that consumers now have more options when it comes to lending and personal finance, and they’re taking advantage of them. Higher costs of living and, for some, sustained unemployment (partially influenced by the Great Resignation) are driving consumers to look for new lines of credit to manage expenses. According to TransUnion, originations for personal loans are expected to continue rising in 2022 to both non-prime and prime and above consumers, reaching pre-pandemic origination volumes last seen in 2019, while credit card origination and balances will hold steady near pre-pandemic levels.

And lenders are happy to lend. Between extra cash on hand from government stimulus, pauses on many financial obligations and new cash flow budgeting options like BNPL taking the payments industry by storm, consumers actually did a pretty good job managing their finances in regard to repaying debts during the pandemic. Delinquencies were at record lows, causing lenders to become more comfortable serving subprime segments that were performing well. As a result, originations for credit cards and personal loans have returned to pre-pandemic levels and have been holding fairly constant over the last two quarters.

This bodes well for financial inclusion and the bevy of fintechs looking to get in on the action. From eCommerce and retail to banking and money transfers, every sector features a fintech company that’s innovating digitally to provide more people with better financial access and positive customer experiences. A recent report by Plaid includes key findings about what consumers want from their financial services: 1) apps and services that work when and how they want and that make it easier to manage money, 2) interoperability, with apps and services providing connected experiences, regardless of the providers, and 3) services that not only help them save money but achieve better financial outcomes. And guess what? Fintech companies are delivering. According to research from Bloomberg, fintech companies now originate 38% of U.S. unsecured personal loans, with a large presence in the mortgage and auto loan categories.

Boiling This All Down

Remember when stimulus money was flowing, consumers weren’t spending as much (because what was there to do?) and instead taking the opportunity to pay off loans and debt and save at record rates? Those times are gone and signs show that consumers are looking to use more credit and take on new loans in response to economic pressures. Unfortunately, a rise in originations will inevitably lead to a rise in delinquencies, especially in a challenging and unpredictable economy. Knowing what comes next, now is the time to start thinking about pre-default and keeping consumers on track with payments and out of collection.

For lenders, this means engaging delinquent customers early on when the first signs of slippage occur, and how you do that is important. Consumers today expect a seamless, personalized experience in every financial transaction, and the right recovery operations can continue to deliver that all the way through the customer journey when you have the right strategy in place. If you don’t know where to start in building a strategy, our Recovery & Collection Starter Kit is a good place.