Some national lenders 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 like 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.
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 Credit.com 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."
Credit card balances have shrunk as consumers have grown more conscientious about charging less and paying down their debt. Banks see personal loans as a good vehicle to help restore their balance sheets, said Christine Pratt, a senior analyst at the research firm Aite Group LLC.
"Consumers are uncomfortable with the concept of a credit card. … So why not try to get some reasonable interest on a loan that is not as risky?" she said. "You want to at least keep your balances level or climbing. And right now they're dropping." For banks, the personal loan is "attractive in that they can charge a reasonable interest rate and make some loans."
Even though personal loans were once more popular, banks contend that historically they have made up only a tiny percentage of total consumer loan balances. (Banks do not break out exact figures for personal loans; they are usually lumped in with other consumer loans.) They still make up a small portion of banks' balance sheets.
During the second quarter, Wells Fargo wrote 23,294 secured and unsecured personal lines and loans (which includes loans for boats, planes and motorcycles), up from 20,505 in the first quarter. The San Francisco bank has more than 2 million of the loans on its books. It has offered personal loans for the last 10 years.
Wells makes unsecured personal loans for $3,000 to $100,000. Most fall just below $10,000, Vallat said. The bank makes bigger personal loans — up to $250,000 — backed by a certificate of deposit.
The terms of the loans range from one to five years. The annual percentage rates fall between 9% and 27.5%, depending on the applicable state laws. Customers with a good relationship can get a rate as low as 8.5%, Vallat said.
"We use risk-based pricing but … we put a heavy weighting on the relationship," he said.
Wells stressed that over the life of the loan, the rate will not change. "Only if an account were to fall into serious delinquency might a rate concession be given as part of a settlement," said spokeswoman Lisa Westermann. Besides a $39 late-payment charge, there are no fees.
Many consumer advocates approve of the loans, especially as an alternative to payday loans.
"Just structurally having that relatively lower interest rate, the longer installment term, those things are all positives," said Leslie Parish, senior researcher at the Center for Responsible Lending.
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.
The Riverwoods, Ill., company, which is best known as a credit card issuer, would not share typical interest rates on personal loans. They are "considerably lower than the average price on a credit card and other unsecured products," said Nick Brown, Discover's vice president of consumer lending.
Citigroup Inc. said it has seen a rise in demand for personal loans, particularly as a debt consolidation tool, but would not elaborate.
It is not for every lender. JPMorgan Chase & Co., for one, said it does not offer personal loans. Neither does Bank of America Corp., although spokeswoman Betty Riess said the Charlotte banking company is evaluating the idea.
Vallat said it may only be a matter of time before banks step up their marketing. Discover's reluctance to share its rates is a case in point.
"I do think that you're going to see the loan rates become more competitive," he said. "I'm aware of other financial institutions that have been considering it."