Steve Rick, chief economist for CUNA Mutual Group. Many credit union members are taking on debt before interest rates rise.

Banks were already under interest rate pressure on personal loans from firms including SoFi and Marcus, and new data reveals that credit unions are also taking a larger chunk of that lending pie.

Credit union loan balances rose 2.3% in May and unsecured personal loans led the way with 3% monthly growth, according to a report that CUNA Mutual Group, an insurance and financial services company that monitors the credit union industry, published this month. 

“Many credit union members are taking on debt before interest rates rise further [to combat inflation] and to consolidate other loans. We expect this trend to continue for the next six months before slowing in 2023, when interest rates will be reaching their peak,” said Steve Rick, chief economist for CUNA Mutual Group.

Unsecured lending grew 13% in the first six months of 2022, compared to 0% annual growth in the first six months of 2021, Rick said.

One of the credit unions seeing more applications for unsecured loans is North Country Federal Credit Union in South Burlington, Vermont.

Personal loans are up 7.2% year-to-date for the $908 million-asset credit union, according to CEO Bob Morgan. But the increase may not be due entirely to new borrowers walking through the doors.

“I think the reason consumer loans are growing in 2022 more rapidly is due to fewer payoffs from mortgage refinances rather than a surge of originations,” Morgan said. “This causes a slower churn for the portfolio and a more rapid rate of growth.”

Morgan said personal lending is a “highly competitive” market among banks, other credit unions and fintechs. “Players like SoFi and Marcus have as much influence or more than credit unions on rates,” he said.

Banks that are active in this space are seeing the effect of new entrants. Stephen Varckette, president and CEO of Andover Bank in Andover, Ohio, said personal loan activity has held at a “pretty normal” pace for the $581 million-asset bank due to the increased competition.

“There are a ton of non-traditional options these days for consumers,” Varckette said. “I assume they are gaining in popularity.”

A combination of factors — the elimination of federal COVID-19 assistance, the rising costs of basic needs and smaller pool of disposable income — is forcing more consumers to seek personal loans to make ends meet.

But those borrowers are scrambling to find the best deals as rates continue to rise.

The average personal loan interest rate has risen from 10.41% at the beginning of May 2022 to 10.60% as of July 20th, 2022, according to Bankrate.com. Personal loan interest rates are likely to continue rising if the Fed raises the prime rate again at its next meeting, the company said. 

When interest rates on deposits are well below inflation, there is little incentive to save. In fact, buying something today may be cheaper than borrowing the money, said Tim Scholten, founder and president of the credit union and community bank consultancy Visible Progress.

So why would that lead to more unsecured debt?

One alternative would be refinancing a mortgage to take equity out, but this is less attractive today due to increased rates — making unsecured debt the next best option, Scholten said.

“Rather than increasing interest on their entire mortgage, it is more cost-effective to take out a higher-rate unsecured loan,” Scholten said. “If I know that things are going to cost 10% more next year than now, it makes sense to buy now with borrowed money and pay it back with inflated dollars.”

Inflation really kicked into high gear in 2022, but salaries haven’t adjusted much yet. At the same time, property values jumped dramatically, and property tax increases are taking a bigger bite out of paychecks, Scholten said.  

As a result, many consumers need more money at the end of their month and are using debt to solve the issue.

“I fully expect this trend to continue as long as banks and credit unions continue to offer unsecured loans at reasonable rates,” Scholten said. “Inflation gives consumers lots of incentive to spend and little incentive to save under the current conditions.”

Vincent Hui, managing director at Cornerstone Advisors, said the firm has noted an uptick in credit card usage — an alternative to taking out more loans — but nowhere near the level that secured loans such as auto and mortgage have reached lately.

“Inflation is a factor, as it is decreasing discretionary spend and people needing to tap into credit,” Hui said. “Either way, overall lending will likely slow as interest rates rise, making monthly payments less affordable for folks.”

Scholten said the popularity of buy now/pay later loans undoubtedly is also having some impact on the personal loan space for credit unions and banks, although he said exactly how much is tough to gauge. 

“I think BNPL growth is an indicator of the current consumer mindset,” Scholten said.