Banks including Wells Fargo & Co. and SunTrust Banks Inc. are expanding their non-credit card installment lending, finding a new avenue for growth in this relatively obscure corner of the consumer banking business. Customers use these generally unsecured "personal" loans in lieu of home equity or card loans, to cover expenses like home repairs or medical bills.
This type of lending is helping some banks gain business from a broader customer base, including the riskier customers they abandoned during the worst of the financial crisis. Those customers still might not qualify for credit cards or mortgages, but banks are reaping the benefits of reaching out to them with alternative loans: SunTrust, for example, saw a 53% increase in personal loans originated in 2011 versus 2010.
"We expect, quite frankly, that we have not scratched the surface of that opportunity," Jeff Hooper, executive vice president and consumer lending manager at SunTrust Bank, told American Banker in an interview this month.
As total consumer lending levels creep up — and falling home prices keep home equity loans largely sidelined — bankers at some companies say more consumers are turning to the niche of personal loans for needs like debt consolidation and home improvements. Customers also use the loans for major life events, like paying for college, weddings and care of elderly relatives.
Increased demand for the products could open up a new income stream for banks, especially in the low interest rate environment, analysts say. Banks tend to charge higher interest rates for personal loans than for other types of consumer products, particularly when a personal loan is not secured with any type of collateral.
"Personal loans lie at the riskier end of the borrowing curve," Jason L. Ware, an analyst with Salt Lake City-based Albion Financial Group, says in an email.
"With a flattening yield curve, higher [increasingly so] capital adequacy requirements, a weak mortgage market, a miniscule Fed discount rate, and tepid demand for debt, banks are looking for places where they can earn some interest on money going out the door," he adds.
Banks also have more flexibility to adjust the terms and pricing of installment loans than they do with their credit card businesses, after the sweeping 2009 Credit CARD Act restricted the fees and interest rates hikes banks can apply on credit cards. As a result, personal loans have become an increasingly attractive alternative for some banks.
"There's a trend away from credit card lending to other forms, including Internet and payday lending … and a search for new products that are less restricted from new regulation," says Irving Levin, the chief executive of Genesis Financial Solutions, a subprime consumer lender in Beaverton, Ore.
"Installment lending has not had the same additional burden placed on it that credit card did. There is more flexibility there [for lenders] in terms of charging fees and interest rates," he says.
Personal loan terms vary across institutions, from a few thousand dollars to more than one hundred thousand dollars, which can be borrowed for several months to several years.
SunTrust is actively trying to capitalize on consumer demand for these products, and is even pushing down its pricing to do so. The bank is extending the maximum length of a loan from 36 months to 72 months, and is "looking at [interest] rates in the 8-10% range" compared with 12-13% previously, Hooper says.
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