Are credit unions about to see a surge in personal loans?

The damage brought on by the coronavirus pandemic has been unimaginable. According Johns Hopkins University of Medicine, there have been over 5.87 million diagnoses of COVID-19 and more than 362,730 deaths around the world.

And in the United States alone, there have been more than 1.74 million cases and well over 100,000 deaths.

In addition to the lives lost, the economic devastation has been unprecedented. In a mere two months, there have been more than 40 million unemployment claims in the U.S. At the onset of the pandemic, the Dow Jones had its steepest first-quarter drop in its 124-year history, while the S&P 500 had its sharpest decline since the 2008 financial crisis.

The economic collapse has extended out to every corner of the country and has spared very few Americans if any at all. For example, when a restaurant closes its doors to comply with social distancing guidelines, a produce farmer loses a client, and so does the trucking company that connects the two.

Financial services company LendEDU has been tracking how the coronavirus is impacting everyday Americans from a financial standpoint. From March 18 to May 5, LendEDU conducted three separate surveys of adult Americans and asked similar questions each time related to personal finances.

By the time of the third survey, coronavirus-related expenses for the average consumer had risen dramatically, from $335.65 on March 18 to $987.20 on May 5. But as expenses continue to climb, savings are moving in the other direction, and consumers are running out of ways to cover costs.

For example, 45% of respondents have had to dig into a savings account or emergency fund to cover costs, including 79% of consumers who have yet to receive their unemployment benefits. Another 55% said they were worried about running out of money, including 86% of those who have been laid off and haven’t yet received unemployment benefits.

And another 33% of Americans have had to take on more credit card debt than desired to cover expenses, including 42% of the poll participants that have not yet gotten their unemployment benefits.

With budgets contracting even as expenses show no signs of slowing down, many Americans are desperate for alternative forms of financing to stay afloat. Unemployment benefits and the economic stimulus checks have been helpful but can only get a consumer so far in 2020.

As a result, it is expected that there will be a surge in personal loan use to cover costs. Personal loans are typically unsecured loans that offer borrowers quick access to cash that can be used for essentially anything. They typically come with a fixed interest rate that can be quite low depending on the borrower’s financial situation.

The process of getting a personal loan is rather straightforward and can be done online, or at a local bank or credit union. The ease of getting a personal loan in 2020 is another reason there may be a surge in applications during this unprecedented time.

What can CUs expect?

So, should credit unions expect to see a surge in personal loan applications in the coming months? Or, will other forms of financing, like credit cards, be the product that consumers turn to during this time?

For a consumer, the main competition for a personal loan is going to be a credit card. And, the first and most important thing potential borrowers will do is compare the interest rates between the two products.

As of May 2020, the average credit card interest rate is 16.01%, while the average personal loan interest rate is 9.63% as of February 2020. However, that can be much higher if a consumer has poor credit.

Yet still, if a borrower has good to excellent credit, a personal loan is probably the better option for them based on interest rates.

Personal loans also may get the nod because of the expected repayment strategies many Americans will implement during this tough financial time. A credit card might be the better financing option if a consumer is able to afford monthly payments in full so that interest won’t apply. But, the data shows finances are so tight for so many that most will likely run up their credit card balance and then carry that balance over.

Interest applies to a personal loan repayment no matter what, but a borrower will still likely be paying a lot less in interest on a personal loan compared to a credit card with a high balance.

Another reason a personal loan has the edge over a credit card during the pandemic is because a consumer can typically borrow a lot more with the former compared to the latter.

For the above reasons, credit unions should expect to see a notable increase in personal loan applications. However, one can never predict that with absolute certainty, as not every consumer is as familiar with personal loans as they are with credit cards, which usually come to mind first when someone needs financing quickly.

Instead of a personal loan, one final option that homeowners might turn to is a home equity loan or line of credit. Because this type of financing is secured against their house, a homeowner can typically get a large loan with a very low-interest rate averaging 5.77% for a home equity loan and 5.41% for a home equity line of credit, which is why credit unions could also see a surge in this type of financing.

With finances hurting for so many Americans, accessing extra money will become commonplace for many Americans, especially in the form of personal loans, and credit unions should prepare accordingly.