February 16, 2022
They say it takes two to tango in lending, and right now it seems like everybody’s dancing. The economy grew 5.7% last year as the government provided nearly $6 trillion in pandemic relief. Americans have cash in the bank and are spending, and consumer credit across the board is expected to rise in 2022.
Credit unions and community banks looking to deploy liquidity need turnkey ways to reach and capture borrowers. Based on LendKey data and conversations with partners, these five asset classes are set to perform well this year, whether directly originated by a lender or purchased through recurring loan participations—which is a low-risk way for lenders to try a new asset class.
1. Personal unsecured loans
On average, Americans owe $6,000 on their credit cards at an interest rate of 16%. Meanwhile, Inflation is accelerating and making everything more expensive, from food to clothing to rent. There are two factors at play this year. Higher costs will eat into savings and consumers will start to rely on revolving balances on their credit cards—until they max those out and need a loan. Also the expected Fed rate hikes will push credit card interest rates higher, driving consumers to seek ways to consolidate their debt.
Lenders have an opportunity to help consumers stay ahead of challenging credit situations by offering personal unsecured loans. We will see this more in 2022.
2. Home improvement loans
With housing in short supply, lenders everywhere are turning their focus to helping homeowners refinance their homes. Total home equity available for borrowing is expected to hit nearly $21 trillion by the end of 2022, according to TransUnion. A good portion of this capital will be poured into home improvement projects.
The pandemic has changed the way we inhabit our homes, with amenities like gyms, home offices, pools and new kitchens topping homeowners’ wish lists. The most common way to pay for these improvements—with a home equity loan or home equity line of credit (HELOC), comes with a lot of downsides for the borrower: Cost, time and collateral.
Lenders, working with a network of contractors, have an opportunity to make financing consumers’ home improvement projects easier and faster. An unsecured home improvement loan eliminates the long underwriting process and does not require a lien against the home. Funds are disbursed directly to the contractor so the homeowner’s project can get underway quickly.
Last year at LendKey, we saw loans in the home improvement category achieve 450% growth over 2020.
3. Auto loan refinancing
Autos are another category where supply is short, demand is high, and prices are going up. Even the value of a used car is 30% higher. It’s a sellers’ market, and dealer and manufacturers’ incentives have all but dried up. With so many buyers on the sidelines, auto loan refinancing is a lucrative asset class for lenders, who can easily find and market to specific customers online who meet their criteria.
Of the $1.3 trillion outstanding auto loan pie, at least one-third are subprime and one out of four loans are mispriced. An auto loan refinance from a 4% to 2% or less interest rate makes someone’s car much more economical while they wait for market forces to swing back in their favor.
4. Student loans
There is $1.7 trillion dollars of outstanding student loan debt in the U.S.. Federal loans, which are funded by the Department of Education, comprise $1.5 trillion of the total outstanding debt. Private loans, which are funded by banks and credit unions, are a much smaller part of the overall student loan debt totalling $137 billion. Private student loans help college students make up the tuition cost difference after grants, scholarships and federal loans are exhausted. Millions of college students—myself included—relied on private student loans.
Upon graduation or shortly after, most students have the opportunity to refinance some or all of their student loan debt. A recent college graduate who is, hopefully, employed, should have a better credit profile than what they had as a student, which would qualify them for a better rate on some of their outstanding student loan debt or present the opportunity to remove a co-signer (likely a parent) from their loans. Lenders should encourage all students to carefully research and weigh the benefits of the current and potential future government loan forgiveness programs before refinancing any of the federal student loans.
Whether originating or refinancing, these loans let lenders lend responsibly while helping students achieve their degrees.
5. Solar loans
The U.S. solar industry installed 5.4 gigawatts of new capacity during the third quarter of 2021, a 33% year-over-year increase—and enough to power 21.8 million American homes, according to a solar industry report. Barring the most recent anomalies in the global supply chain, prices on solar panels should continue to drop as consumer demand increases for cleaner and cheaper sources of energy for their homes. This halo effect will benefit lenders looking for a new asset class.
Lenders can facilitate the solar panel financing process by partnering with trusted solar system installers who educate homeowners and businesses on how to improve their ever-rising electric or fuel bills with solar roofs or panels. Installers can offer a 15- or 20-year solar loan at the point of sale to make the purchase feasible.
The benefit to homeowners is a lower monthly energy bill and fixed energy costs for the duration of the time they own the home.
Economic winds are the strongest they’ve been since 1984 and the need to deploy capital is as high as ever. These five asset classes are an easy, future-forward way for lenders to expand their horizons and meet their customer and members’ evolving needs. I’ll continue this blog series with a deeper look at the market opportunities for each asset class.