According to the TransUnion Payment Hierarchy Study, the average consumer tends to prioritize unsecured personal loan debt ahead of mortgages, credit cards, and auto loans when faced with financial distress.
The results suggest that fiscally constrained borrowers will move towards paying their personal loans first, their auto loans second, their mortgages third, and finally their credit cards last.
The study further suggests that this will not change in 2018 unless a serious trauma to the market happens. Although TransUnion nor any other player in the industry can predict what will happen in 2018, the trends show that personal loans will continue to be the first option for consumers within the payment hierarchy.
This annual survey, first launched in 2010, is the premier study in the industry that presents a payment dynamic hierarchy among consumers. 2017 is the first year that TransUnion has included unsecured personal loans within the hierarchy, explaining the surprising result. Since 2004, consumers have been consistently prioritizing auto loans over their other debt, but this latest analysis moves away from these established trends from the past.
When a consumer is looking at his or her debt, they will normally look at the length of the terms before deciding what to prioritize. For instance, in Q4 of 2016, the average personal loan term was a mere 28 months. While at the same time, the length of an auto loan averaged 60 months, while mortgages averaged 230 months. This suggests that consumers are looking for a quick win, and it further enshrines that a ‘light at the end of the tunnel’ theory of consumer debt is consistent in the United States market.
According to Ezra Becker, Senior Vice President and Head of Research for TransUnion’s Financial Services Business Unit, this is not surprising. He states that consumers see an end date as a good thing, and “finding an opportunity to pay a debt in full can be a powerful motivator for a struggling consumer.” This is especially true when you consider the United States went through a tough housing recession only a decade ago.
Before 2008, the consumer market was focused on their long-term debt with a majority of Americans focusing on paying down their mortgage rather than their credit card debt. This was turned upside down during the housing crash, and many indebted Americans put an emphasis in making their credit card payments and protecting their liquidated assets rather than their mortgage. The drivers of these decisions are complex and often change over time.
Since this study is yearly, the team at TransUnion has been able to decipher thousands of data points which all offer insight on the consumer decision-making process year-over-year. These critical drivers include the labor market, housing values, the timing of consequences, the availability of alternatives, and of course social stigma that surrounds debt. This year’s study is no different, but what is different is the results of the hierarchy.
Author: Mike Brown
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