Since the 2008 financial crisis, the U.S. consumer borrowing landscape has shifted significantly. In Q2 2024, consumer credit increased at an annual rate of 2.1%, with non-revolving credit (such as auto and student loans) growing by 3.4%. (Federal Reserve Consumer Credit Report) This data reflects a clear trend: Americans are moving away from high-interest credit cards and opting for installment loans to finance major expenses like cars and education.
Key findings:
- Shift from High-Interest Credit: People are moving away from using high-interest credit cards and payday loans. Instead, they’re choosing installment loans for things like cars and education. For example, in Q2 2024, non-revolving credit (like car loans) grew by 3.4%.
- Rise of Fintech Options: New companies like Affirm and Klarna are offering easier and cheaper ways to borrow money. These options are especially popular with younger people who prefer to pay in installments instead of using credit cards.
- Household Debt is Growing: Even though the type of debt is changing, people are still taking on more debt overall. By Q2 2024, consumer credit reached $5.078 trillion, showing that borrowing is still very common.
- Smarter Borrowing Choices: People are becoming more careful about the loans they take. They’re looking for better deals with lower interest rates. In Q2 2024, the average interest rate for personal loans was 11.92%, indicating that people prefer loans that are easier to manage.
Why Has Credit Card Usage Declined?
Credit cards used to be the go-to option for many people when it came to borrowing money for everyday expenses and big purchases. They were convenient and flexible, allowing consumers to buy now and pay later. However, after the financial crisis of 2008, a lot of people started to rethink their reliance on credit cards.
The high interest rates made it expensive to carry a balance, and many found themselves struggling to pay off their debts. New laws made it harder to get and use credit cards, prompting consumers to look for other borrowing options.
Revolving Credit vs. Non-Revolving Credit
Revolving credit (which includes credit cards) increased at an annual rate of 1.2% in Q2 2024, a significant slowdown compared to previous years, reflecting the ongoing decline in reliance on this type of credit.
Meanwhile, non-revolving credit, such as auto loans and student loans, increased at a faster pace of 2.9% annually during the same period. (Federal Reserve Consumer Credit Report)This shift highlights the broader trend of consumers moving away from high-interest, unsecured revolving credit.
Credit Card Usage Declining
For example, according to a survey by the Federal Reserve, younger people are now 20% less likely to use credit cards compared to a decade ago, favoring alternatives like personal loans and installment plans.
However, personal loans can sometimes fall into the same category as unsecured loans like credit cards if they are unsecured personal loans from an alternative lender.
Why Unsecured Debt Products Like Credit Cards and Car Loans Are Falling Out of Favor?
Credit card usage isn’t the only thing that’s declining; in fact, several types of unsecured debt products are falling out of favor as consumers become more cautious about their borrowing habits. Here are a few examples:
| Type of Loan | What it is | Why it’s declining |
|---|---|---|
| Credit Cards | Unsecured revolving credit for everyday expenses. | Usage has declined due to high-interest rates and increased awareness of financial risks. |
| Personal Loans | Unsecured loans typically used for debt consolidation or large purchases. | Popularity has decreased as consumers look for lower-interest alternatives like secured loans. |
| Auto Loans | Loans used to finance the purchase of a vehicle. | Shift towards leasing and longer loan terms to lower monthly payments, reducing the attractiveness of traditional auto loans. |
| Payday Loans | Short-term, high-interest loans intended for emergencies. | Decline due to regulatory crackdowns and growing awareness of the debt traps associated with payday loans. |
Reasons Unsecured Loans Are Declining
There are a few different reasons that unsecured revolving credit loans have been declining. Part of this has been the government’s interest in protecting the consumer; part of it has been led by generational change, and part of it has been led by technology and innovation. The main reasons for the decline are as follows:
High-Interest Rates
Similar to credit cards, other unsecured loans often come with high interest rates. For example, unsecured personal loans can have interest rates as high as 30%, making them expensive for borrowers.
In Q2 2024, the average interest rate for personal loans stood at 11.92%, highlighting the cost of unsecured borrowing. (Federal Reserve Consumer Credit Report) Consumers are increasingly wary of accumulating debt that grows quickly due to obscene interest rate fees and charges.
Financial Awareness
The financial crisis of 2008 and recent economic uncertainties have made consumers more financially literate and cautious. More people are now prioritizing budgeting and avoiding high-interest debt. A survey by the National Foundation for Credit Counseling found that 42% of Americans now follow a monthly budget, compared to less before the financial crisis.
Regulatory Changes
New regulations have made it harder for lenders to issue certain types of unsecured loans, especially those with predatory terms like payday loans.
For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act increased oversight and imposed stricter rules on payday lenders, which has significantly reduced the availability of these high-interest, short-term loans.
Alternative Financing Options
With the rise of financial technology (fintech), there are now more alternative financing options available. Peer-to-peer lending platforms like LendingClub and buy-now-pay-later services like Afterpay and Klarna offer consumers more flexible and often lower-cost borrowing options compared to traditional credit cards and personal loans.
Changing Consumer Preferences
Modern consumers, especially younger generations, prefer financial products that offer flexibility and lower costs.
For example, many millennials and Gen Z consumers are choosing debit cards or digital payment methods like Apple Pay and Google Wallet over traditional credit cards. They are more likely to use financial products that align with their financial goals and savvy digital lifestyle, such as budgeting apps and investment platforms.
The Rise of Installment Financing
The fact that unsecured loans like credit card debt and payday loans are declining doesn’t mean that debt is disappearing in general.
Taking on debt to buy things or invest is part and parcel of the American dream. The major difference in the current economic client is the shift from high-interest rate unsecured revolving debt to installment financing.
This shift happened for several reasons. First, installment loans usually have lower interest rates than credit cards, making them cheaper in the long run. Second, they come with fixed monthly payments, which makes it easier for people to budget and plan their finances.
This predictability is a big plus for many borrowers. New companies like Affirm, Klarna, and Afterpay have emerged, offering “buy now, pay later” options that let people split their purchases into smaller, more manageable payments without the high interest rates of traditional credit cards.
These companies have made installment financing more accessible and attractive, especially to younger generations who prefer these flexible payment options. Below is an example of some of these types of loans that are now in favor:
| Type of Installment Financing | What It Is and How It Works |
|---|---|
| Secured Personal Loans | Loans used for a variety of purposes, including debt consolidation, home improvements, and major purchases. These loans are secured by collateral, resulting in lower interest rates and fixed repayment terms. |
| Mortgages | Long-term loans used to purchase real estate. These loans are secured by the property itself and usually have fixed or adjustable interest rates over a period of 15 to 30 years. |
| Student Loans | Loans specifically for funding education. These can be federal or private loans and typically offer lower interest rates and flexible repayment options. |
| Buy Now, Pay Later (BNPL) | Short-term financing options offered at the point of sale that allow consumers to split purchases into smaller, interest-free payments. Companies like Affirm, Klarna, and Afterpay are popular providers. |
| Fintech Installment Loans | Loans provided by financial technology companies. These often have more flexible terms and quicker approval processes compared to traditional banks. Examples include SoFi and LendingClub. |
What do these loans all have in common?
Generally, these types of loans have the following in common.
- Lower Interest Rates: Installment loans generally offer lower interest rates than credit cards, making them a more affordable option for consumers.
- Fixed Repayment Terms: Unlike revolving credit, installment loans have fixed repayment schedules, providing borrowers with predictable monthly payments and a clear timeline for debt repayment.
- Secured Nature: Many installment loans, such as auto loans, are secured by collateral, reducing the risk for lenders and enabling them to offer more favorable terms.
Does Less Unsecured Debt Mean Less Debt in General for People?
No, it does not. Household debt is actually climbing, just in a different way. While people are using less unsecured debt like credit cards, they’re taking on more installment loans for things like cars, homes, and education.
In fact, consumer credit outstanding reached $5.078 trillion by Q2 2024, a significant increase from previous years, showing that while the type of debt is changing, the overall debt burden is still growing. (Federal Reserve Consumer Credit Report) So, overall debt levels are still going up, but the type of debt people are choosing has changed.
The Future of Unsecured Loans and Installment Financing
So, is this a permanent trend? Will unsecured consumer loans continue to decline as installment financing gains ground? Here are some things to consider
The Interest Rate Environment Could Change
Unsecured revolving loans, like credit cards, come with higher interest rates, making them expensive to maintain. In a high-interest environment, these rates can become even more burdensome for consumers, pushing them towards installment loans with fixed, lower rates.
For example, a credit card interest rate might jump from 18% to 22%, making it tough to pay off the balance. In contrast, a car loan at 4% to 6% becomes more appealing. However, if interest rates drop, unsecured personal loans might become more attractive again, offering easier access to funds without the need for collateral.
Technology and AI
Artificial Intelligence (AI) is changing the game in lending. AI can quickly and accurately assess who is a good candidate for a loan by looking at a lot of different data, like your spending habits and income patterns. This can make it easier for people with non-traditional credit histories to get loans that are not unsecured loans with sky-high interest rates.
But there’s another side: AI might also lead to more scrutiny and could potentially introduce biases in who gets approved. As AI gets smarter, it could make getting loans faster and more personalized, but it also raises questions about privacy and fairness.
The Buying and Selling of Debt
Banks and financial institutions trade debt, which means they buy and sell loan portfolios. This can affect the types of loans available to consumers. When banks sell loans, they free up money to lend more. This could lead to more competitive loan offers for borrowers. On the flip side, if the market for trading debt becomes too speculative or unstable, it could lead to problems.
Furthermore, government regulation can have an adverse effect as well if it makes it more difficult to lend. For instance, if economic conditions or government regulation change rapidly, the value of these loan portfolios could drop, affecting the loans banks are willing to offer. This, in turn, can force people into the unsecured loan market, and it could make a comeback.
Bottom Line: Consumer Debt and Borrowing Will Always Be There, but It Is Changing
The financial world has done a 180 since the 2008 meltdown. High-interest credit cards and payday loans are getting the cold shoulder, while installment loans for things like cars and college are the new kids on the block that everyone loves.
Why? Well, people are tired of getting hit with sky-high interest rates on unsecured debt and are now savvier about their finances. But don’t be fooled—household debt isn’t disappearing; it’s just getting a makeover. We’re still borrowing, just smarter and with more manageable terms.
So, while it’s out with the old (high-interest revolving debt) and in with the new (installment plans), the bottom line is: we’re still knee-deep in debt, just dressed a bit better.
That being said, installment plans and lower interest rates are a good thing for consumers, and the fewer unsecured high-interest-rate loans there are, the better they and we as a society can manage.