Big Lenders Expanding In Unsecured Loans

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SAN FRANCISCO – Credit unions may find themselves competing against national lenders that are ramping up offers of unsecured personal loans to consumers who can no longer borrow against their home equity and have grown disillusioned with credit cards.

For companies such as Wells Fargo & Co. and Discover Financial Services, the loans generate a steady revenue stream – and, in an era of increased regulatory scrutiny, potentially fewer compliance and public relations headaches than other retail loan products.

Consumer advocates have been hard pressed to find anything inherently deceptive about the personal loan, which predates the credit card and has terms that consumers can easily understand, according to American Banker, an affiliate of Credit Union Journal.

A personal loan is "a product that has been out there for a long, long time that our parents and our grandparents used to use [that is] back in vogue again," said Brent Vallat, Wells Fargo's head of personal credit management.

During the second quarter, banks sent out 82 million solicitations for personal loans, estimates Mintel Comperemedia Inc., a market research provider, up 13.2% from the first quarter and 1.5% from the year-ago period.

The loans are gaining popularity among consumers as a way to consolidate debts, finance home improvements or other large purchases, or raise emergency cash – things that before the crisis they typically did by taking out a second mortgage or swiping a card.

But after the fall in home prices and tightening of lending standards in recent years, "some of those options aren't there anymore," Vallat said.

Unlike credit cards, personal loans have set terms. A consumer borrows a certain amount of money to be paid back by a specific date through regular monthly payments. A borrower who falls behind on a payment is charged a late fee but no other fees.

"It's a very predictable product," said John Ulzheimer, president of consumer education at the lead-generation company Inc. "You know what your interest is, you know what your payment is. The lender knows how much they are going to make for 'X' number of months."

Discover is sending out offers for the loans to prospective customers after prescreening them to ensure they meet minimum credit standards. It makes loans for $3,000 to $25,000 with terms of two to seven years.

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