Personal Loans, Trends

Part
01
of four
Part
01

Consumer Personal Loans: Legal and Regulatory Analysis

Most countries around the world have put almost similar laws and regulations that guide personal consumer lending. However, almost identical, the laws and regulations are made by each nation to suit consumers in their respective jurisdictions. Of the measures put in place in various countries are- Introducing capping on consumer loans, disclosures, risk warning and advertising, and enforcing responsible lending among lenders.

Capping Credit Cost

  • Generally, most countries have put capping legislation on consumer loan products. The capping is mainly on the interest rate and the general cost of credit. The assessment done by some countries has shown that introduction of caps has a decisive role in mitigating consumer exploitation. Capping legislation has also led to a reduction of defaults and over-indebtedness to consumers.
  • For Instance, in Poland, the Act amendment on financial supervision in Banking Act of 5th August 2015 and coming to force on 11th march 2016 introduced a cap on Non-interest cost of credit, “which cannot be higher than 25% of the total credit (loan) amount plus 30% of the total credit (loan) amount per annum.” Additionally, “the non-interest charges will no longer be permitted to exceed 100 percent of the total amount of the credit.”
  • In South Africa, the presence of staggered capping for short-term consumer credit has discouraged reckless lending. The rate cap stands at 5% in the first year and 3% in subsequent years.
  • In 2013, Chile introduced a law capping on the nominal interest rate, which gradually reduced the rate from 54% previously to 36% currently.

Disclosure, Risks Warnings and Advertising

  • Most countries have set out regulations for lenders to disclose the terms and conditions of personal loans. In the disclosure document, consumers are advised on the cost of credit they are about to take. Disclosure of such information is meant to encourage borrowers to assess their choice better and find an alternative source of financing.
  • In some Jurisdictions, lenders are advised to include warnings that redirect consumers to the web page of the financial regulator.
  • A study conducted by the European Commission noted that well-designed information disclosure also supports a more effective decision-making journey by consumers to compare offers or by facilitating their understanding of the loan products’ characteristics.
  • In Hong Kong China, lenders must provide a copy of the terms of the agreement to the borrower and, since December 2016. Lenders the country are required to keep written, video, or audio records, which shows that they explained to the borrower all terms and conditions of the loan agreement before entering into such a contract.
  • In Ireland, the Central Bank of Ireland (CBI) requires all Moneylenders to display the warnings in prominent codes. It is also a requirement for lenders to “prominently indicate the high-cost nature of the loan on all loan documentation where the APR is 23% or higher.
  • In the United Kingdom, High-Cost Short Term Credit (HCSTC) must also carry a prominent risk warning that redirects consumers to the website of the authority in charge of debt advice in the country, the Money Advice Service.

Responsible Lending

  • Most countries around the world have emphasized lenders to apply responsible lending obligations when lending personal loans to consumers.
  • In the Czech Republic, the consumer act of 2016 introduced stricter measures on creditworthiness assessment. Lenders are required to "collect detailed information on clients' income and financial liabilities and are under the obligation to verify information given by the consumer according to a particular situation."
  • On 19 November 2015, Lutheran president signed amended and supplemented Law on Consumer Credit, which was adopted by the Lithuanian Parliament. The amended law, which came into effect in February 2016, required lenders to ''inspect databases and available registers whenever assessing customer creditworthiness. Lenders are required to update information on the creditworthiness of consumers in case of an increase in credit amount. The lenders were previously required to do so if information obtained from the customer was insufficient.
  • In 2010, Japan introduced limits that prohibit lending to consumers amount exceeding one-third of one's annual income. Previously, persons were allowed to borrow as much the lending firm could offer.

Research Strategy

The research team set out to determine the law and regulations applied in different countries when lending to personal consumer loans. The team was able to identify almost similar rules that were implemented in nearly all countries the team picked. The team determined that rate capping, disclosure, and risk warnings as the principal regulations which have been amended in 10 years by different countries to suit and protect consumers in their jurisdiction.
Part
02
of four
Part
02

Consumer Personal Loans: Economic Trends

The global economy is likely to shrink by 1% in 2020. Developments such as the proliferation of Covid-19 cases and the consequent disruption of the supply and trade chains are estimated to reverse the trends of stable economic and job growth experienced in the last decade. The loss of employment, cessation of business operations, and closing of borders will potentially reduce the demand for goods and services. The tepid economic situation creates new opportunities and challenges in the personal loan market. Some of these include:

RISE IN DEMAND FOR PERSONAL LOANS

  • Many economies, such as the U.S., Canada, Japan, South Korea, Singapore, Brazil, Argentina, Mexico and China, face the threat of recession. The pandemic may trigger a drop in household income as businesses shrink or shut down.
  • Firms such as Amtrak—a passenger railroad service provider in the U.S.—have asked non-essential employees to go on unpaid leaves and others will lay-off employees as operations shrink. Those in the gig economy will have reduced hours.
  • In the U.K., the tourism industry is struggling with a cash crisis. Tourist bookings have dropped by 10%, and in some regions, such as Cumbria and Devon, up to 80%.
  • With the rising unemployment and consequent financially tricky situation for many, consumers are likely to rely on personal loans—as they are unsecured and lenders have little recourse when there are defaults. Banks in the U.K. are experiencing a "flood of applications" for personal loans. Consumers in the U.S. face a credit crunch.
  • Financial firms in the last six years have been liberal in their approach to personal loans but are currently reassessing risks.

SOME FINANCIAL INSTITUTIONS OFFER PERSONAL LOANS AT LOW-INTEREST RATES

  • The economic slowdown is an opportunity for banks to offer small personal loans to customers in distress. Banks are better-placed to extend support through this crisis than they were during the 2008-09 crisis. Several financial institutions have introduced measures to offer personal loans at low or zero interest rate.

EMI MORATORIUMS ACROSS THE WORLD

  • In response to the slowdown, banks globally are considering deferment of EMI payment on some loans. The details of suspension vary across countries. While some have suspended mortgage repayments, others have suspended repayment for all loans, including personal loans.
  • The central bank in India—Reserve Bank of India—has advised private and state-owned banks to defer principal and interest payment for three months starting from 1 March 2020 to 31 May 2020. Several banks, including IDFC First Bank, Bank of India, and HDFC Bank, have since introduced moratorium for personal loans.
  • Malaysia's central bank has suspended principal and interest payment on all loans for six months. The moratorium is automatic.

RESEARCH STRATEGY

To identify economic trends impacting the consumer personal loan lending space, the research team reviewed media articles and central bank notifications issued in the past two months. We searched through articles published in countries from different continents, including America, Europe and Asia, to cover global trends. Most comprehensive research on personal loans market such as the report published by Market Watch is dated in light of the slowdown triggered by the epidemic. We have thus refrained from using these.
Part
03
of four
Part
03

Consumer Personal Loans: Technological Trends

Examples of global technological trends within the consumer personal loan lending space include the giving of unsecured personal loans through the use of digital channels and the use of artificial intelligence in consumer lending. Lending organizations such as HSBC and Equity Bank Kenya Limited are at the forefront of giving consumer personal loans through the use of digital channels such as mobile and internet. A detailed overview of the research findings follows below.

Unsecured Personal Loans in Digital Channels

  • According to the Financial Brand, one of the major technological trends in personal lending within the consumer lending space is the issuance of unsecured personal loans via digital channels.
  • Here, lending organizations make use of digital platforms such as mobile applications and websites to process consumer personal loan applications and disburse money to borrowers.
  • According to a PWC report, consumers are attracted to digital lending channels because they "simplify the loan process and provide the fast loan experience" that borrowers want.
  • In reference to the report, a majority of consumers now prefer to apply for loans online and this is especially true for young borrowers. A survey conducted by PWC noted that the preference for online interactions in consumer lending has increased by 30%. To leverage this need, lenders need to create viable digital processes if they wish to compete across all consumer segments and demographics.
  • This trend is impacting the consumer personal loan lending segment because as seen above, more and more consumers have a preference for digital lending channels because they offer simplicity, efficiency, and convenience in borrowing.
  • Examples of banks that are experiencing the impact of this trend include Equity Bank Kenya Limited, HSBC, and Avant.

AI-Powered Consumer Lending

  • The Financial Brand also lists AI-powered consumer lending as one of the major technological trends that is being experienced in lending within the consumer personal lending space. This is because lenders across the world have been implementing the use of AI in their consumer lending business segments.
  • According to a report by CAPCO, lenders use AI by "harnessing advanced analytics and non-traditional data as they automate and fine-tune" their personal loan lending processes.
  • In AI-powered consumer lending, banks use AI and data analytics to find prospects, evaluate creditworthiness, and monitor/manage consumer loan portfolios more effectively.
  • AI is a useful technological tool in consumer lending because it has the potential to "expand the availability of consumer credit by evaluating factors that go beyond traditional credit metrics."
  • The impact of this trend In the consumer personal loan lending space is evident in the fact that AI is an important technological tool that is used by lenders to determine creditworthiness, streamline the loan process, and improve customer experience for borrowers.
  • A study that was conducted by ICICI Bank found out that an estimated 32% of financial service providers in India have already begun using AI in consumer lending.
  • Consequently, it can be concluded that India is one of the countries in the world that is expected to experience the impact of this trend.
Part
04
of four
Part
04

Consumer Personal Loans: Societal Trends

Introduction

Personal loans have been on a steady rise with loans originating from established fintech companies as well as new startups. The growing popularity of home improvement projects, young adults' fear of missing out (FOMO), and consumer's response to fintech companies' savvy use of AI and other technology are a few trends impacting the personal loan lending space.

Home Improvement Projects

Fear Of Missing Out (FOMO)

  • Millennials have more debt than any generation in history.
  • Social media is a common motivator due to peer pressure to spend more money.
  • According to an Allianz Life study, 61% of millennials felt inadequacy in their lives due to what they saw on social media.
  • A Merrill study, showed almost half of their respondents admitted to being addicted to social media where 70% of young adults experienced FOMO due to the lifestyle their friends on social media.
  • A 2019 Credit Karma survey revealed FOMO fueled debt is gaining momentum, up 40% over the previous year with almost half of millennials overspending to keep up with friends.

Fintech Companies Influence Consumer Use Of Personal Loans

  • The growth of personal loans has correlated with the surge of fintech companies use of technology to make obtaining a loan easier than ever before. Consumers are more likely to qualify for loans from fintech companies and start-ups over traditional banks and credit unions.
  • In Latin America, where loans are less accessible, fintech companies have a competitive edge to fill in the gaps to provide loans which are otherwise more difficult to obtain. In Europe, fintech companies have provided similar benefit.
  • Starts-ups have contributed to the growth of personal loan use and account for 40% of new personal loan originations.
  • Online lenders are marketing personal loans as a better alternative to high interest rate credit cards.

Research Strategy

The trends identified in this research appeared across multiple resources. Most of the information found was specific to America, however, it can be surmised that the impact of FOMO and Fintech influence have a global reach.



Sources
Sources

From Part 02