Halloween is next month so be on the lookout for ghosts and goblins. Just as scary as the traditional Halloween fare is the amount of unsecured debt in this country.
According to a recent article in the Scottsman Guide, last year the total number of unsecured personal loans in the U.S. rose to nearly 29 million, a 7.1% increase from the previous year. The average loan balance jumped to $19,402, up 6.3% from the previous year, according to Experian. A major driving factor behind this rapid rise is the number of fintech companies partnering with banks and other nonbank financial companies to provide hassle-free loans to borrowers.
The nearly $200 billion in unsecured loans is just a fraction of the $12 trillion in mortgage debt that Americans will carry in 2024. Unlike their unsecured counterparts, however, mortgage loans are collateral-backed and have a definite regulatory landscape, protecting both the borrower and lender.
Moreover, the increase in unsecured loans could greatly impact the credit ratings of millions of people, potentially hindering their future homeownership prospects. Thus, there is an immediate need to establish a strict regulatory landscape to control the growth of unsecured loans, ensure compliance, protect borrowers’ interests, maintain order within markets and more.
Regulatory call
Creating a strict regulatory landscape for unsecured lending is a must for several reasons. It can create a measured approach for lending, thereby fortifying the lenders’ loss-absorbing buffers.
Regulatory measures can also help check the unhindered expansion of unsecured credit as well as reduce risks, especially for nonbank financial companies. Additionally, they will help calibrate and stabilize growth, potentially reducing non-performing assets.
Apart from this, setting up a regulatory landscape for unsecured lending can lead to a more secure environment, encouraging lenders to allocate more capital to this segment. Furthermore, it will enable the authorities to safeguard the interests of consumers, contributing to overall economic growth.
This stands in stark contrast to the mortgage market, which is regulated by several laws that are enforced by agencies on both the state and federal levels. These laws aim to protect borrowers from predatory and deceptive lending practices, along with safeguarding the mortgage segment from financial risk.
By 2026, the global unsecured lending market is predicted to reach $5.39 trillion, indicating a 9.5% compound annual growth rate. A major driving factor behind these increasing numbers is the advent of digital lending platforms, which make Unsecured loans, by nature, easy and hassle free. They do not require collateral, which means they often have higher interest rates, increasing the risk for lenders. Hence, the surge in unsecured loans could have increased implications for borrowers’ credit ratings.
There has been a significant rise in fintech companies and digital lending platforms in recent years. They usually target the unbanked sectors and facilitate instant disbursal of collateral-free loans. In the effort to make credit more easily available, these companies often overlook the borrower’s ability to repay the loan, resulting in rising defaults, especially in the high-risk, low-ticket segment.
As more consumers take advantage of these high-interest loans, the likelihood of defaults rises, which can adversely affect credit scores in future.
A low credit score decreases the chance of securing loans, and borrowers might face difficulties repaying them in the future. As credit scores deteriorate, borrowers’ ability to qualify for mortgage loans can be compromised, delaying or preventing homeownership for some borrowers who might have to remain renters longer.
To read the entire article, go to: https://www.scotsmanguide.com/residential/the-debt-crisis-that-could-haunt-the-mortgage-market/
