Rise in personal loans suggest consumers are taking on debt to cover bills

Monday, 3 October 2022

Centrix managing director Keith McLaughlin gives a rundown of default and arrears trends appearing in the market.

A rise in people taking out personal loans is likely to reflect that more people are turning to credit to help fund essentials and service debts, Centrix managing director Keith McLaughlin says.

The credit bureau recorded the number of new consumer loans granted in August hitting a 10-month-high.

McLaughlin said this, alongside indicators that suggested discretionary spending was being cut by many households, was likely to mean the personal loans were being used as a stop-gap to make ends meet and supplement incomes.

“We don’t want to be the prophets of doom, but these numbers do tell a story, and I think they tell a story that a lot of people expect might be happening,” he said.

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Another worrying trend was the rise in missed payments on buy now, pay later (BNPL) schemes, he said

A little over 9% of this type of interest-free consumer loans were in arrears in August, suggesting more borrowers were struggling financially. The overall spending via BNPL had also dropped, he said.

McLaughlin said with BNPL enquiries down 27% year-on-year, the sector would suggest consumers were cutting back on discretionary spending.

The changes brought the number of BNPL borrowers behind on payments to 57,000, compared to 52,200 last month.

There have been reports of BNPL companies struggling financially despite their adoption by about 1 million consumers.

There has also been another up-tick on missed payments on vehicle loans, with 4.8% of such loans now having missed payments.

The number of vehicle loan with borrowers behind on payments sat at 10,750, compared to 9950 last month, and had been increasing for the past five months.

McLaughlin said the factors creating concern for borrowers were multiple and obvious, including higher interest rates, home loan rates, inflation and economic uncertainty.

Centrix managing director Keith McLaughlin says people pay their home loans first, and then worry about other debts.

He said it could be expected missed payments would start on small consumer loans like BNPL, and then flow onto bigger ticket items like cars, and finally mortgages – which borrowers would do everything to avoid falling into arrears on.

Arrears in all three areas were increasing, albeit at different pace.

“We’re not saying the alarm bells should be ringing out there, but if you take a step back and say ‘what do you think is happening in the economy at the moment?’ this sort of confirms what you’d expect,” he said.

“What we are starting to see is a change of circumstances that are beyond the borrower’s control, and that’s things that are affecting the household, and if unemployment starts to rise, heaven forbid, that will have a material impact.”

Home loan arrears were up 0.2% in August to 0.98%, resulting in 14,200 mortgage accounts being past due.

That rate of about one in 100 home loans accounts being overdue had been relatively stable since June last year, and Centrix said there was little sign of mortgage stress emerging, despite the ongoing cost-of-living increases.

Mortgage demand had fallen in line with the cooler housing market, down 33% year-on-year, he said.

“Many are choosing to focus on their mortgages, due to interest rate hikes, in order to keep their largest asset well and truly secure,” McLaughlin said.

He said consumer confidence had taken a hit, and while official forecasts did not point to a recession, it appeared there were more challenging months ahead for.

McLaughlin said there were two factors to consider when discussing a possible recession. A technical recession, and the chilling effect of the anticipation of a recession.

He said gross domestic product data suggested a technical recession was not likely, but Centrix’s data suggested for some, the anticipation of a recession was affecting behaviour.

People appeared to be coping with their higher energy bills, he said.

“While there has been a slight upswing in missed energy bills, this remains below historic levels as Kiwis keep themselves warm heading into the spring months.”

There were also some silver linings for the “underdogs of the pandemic”, tourism and hospitality, he said.

“Both the tourism and hospitality sectors are seeing improved trends as international travellers, both holidaymakers and those on working visas, are making their way to our shores in greater numbers.”