In the U.S. we have observed an unprecedented spike in credit card usage and personal loan applications, bringing into question American consumers’ spending habits. According to data from Equifax, personal loans are up more than 11.9% from the same time a year ago. This makes personal loans the fastest growing type of consumer debt, putting them on a growth trajectory not seen since shortly before the Great Recession.
The nation’s top 3 consumer credit agencies—Equifax, TransUnion, and Experian—have all reported double-digit growth in consumer lending in recent months. Accompanying this rapid growth is the increase in credit card debt, with the average American racking up over $6,000 in credit card debt in 2018.
Credit card debt is up almost 3% from the previous year. According to recent studies, the average credit card debt accumulated by U.S. households was $8,398 per household in June of last year, while the average new auto loan was a shocking $32,187 during the first four months of 2019.
Credit is everywhere, and not just in the U.S. The accruement of personal loan debt all over the world—especially that of student debt—is staggering. From auto loans to student loans and long-term personal loans, millions of people are currently crippled by debt.
In Africa, those that live on loans experience first hand what a double edged sword debt relief is. With the poorest of the people using a large portion of their income just to pay off their growing debt, there doesn’t seem to be an end in sight. Their president is currently fighting for a means to end this vicious cycle, offering everything from passing a new law that suspends the existing debts for vulnerable borrowers, to debt counselling.
Debt counselling is available all over the world to help those who are drowning in debt, however, it has not been made easy by the rapid growth in personal debt over recent years correlates with the explosion of fintech (financial technology) that has risen to challenge traditional banks. A proliferation of apps and websites dedicated to making banking easier than ever have surfaced, making obtaining loans as easy as clicking a button. Since 2013, much of the growth in personal lending has in fact been driven by loans originating from fintech firms. Almost 40% of unsecured personal loans now originate from fintech lenders, up from just 5% in 2013. The thing is, all this debt makes no sense. Usually, debt gets racked up when a country is entering an economic crisis, but since October any fears of a U.S. recession have eased and the economy seems healthier than ever. Paychecks are growing. Workers seem happier than ever, and the country’s GDP growth rate is expected to fall below the 2% and 3% ideal range. It’s as good as it gets, really. So why is the nation struggling to finance purchases upfront and resorting to paying with what traditionally has been, well, the last resort (i.e. credit)?
Business Economist Eldar Beiseitov attributes the rapid rise of the ‘fintech lenders’ to fintech’s capacity to offer lower interest rates when compared with rates from credit card companies. But, more than anything, he says it is fintech’s user-friendly loan application processes that tend to attract consumers.
Thanks to the marketing efforts of fintech firms, Beiseitov confirmed that consumers could recognise online lending as an easy, convenient, and fast way to get a loan. Beiseitov added that loan applications could be completed in only a few minutes and could be decided in as little as 24 to 72 hours!
The growth of fintech aside, society’s mentality toward money and finance is evolving, with more Americans going cash-free, thus increasing their dependence on cards and digital assets. Roughly 3 in 10 American adults say they make no purchases using cash during a typical week. About 46% don’t worry about having cash on them because there are plenty of alternative payment options.
While fintech markets itself as ‘for the people’, many believe that the cashless society is in fact just a con and that big finance is behind it. Cash encourages self-control and enable spenders to better manage their finances, while spending online or by card is said to encourage spending. The implications—that people are racking up unanticipated credit and debt—are inevitable.
Compare keeping $50 in your wallet to keeping $50 secured in an online account. The account comes with hidden fees and costs and is attached to recurring bills and other payments. It isn’t difficult to see which one is easier to keep tabs on. It’s easy to see why consumers are finding it increasingly difficult to differentiate between ‘real’ assets and ‘borrowed’ ones, when both appear so accessible via digital banking solutions.
Perhaps socioeconomic factors are to blame. Perhaps financial technology is the reason debt is growing faster than a weed.