Consumers Are Repaying Cell Phone Debt Before Making Car Payments

U.S. consumers are more devoted to their mobile phones than their automobiles.

The sea change has taken place over the last few years as mobile devices become an integral tool not just for communication with loved ones or employers, but also everything from banking to dating to watching TV and listening to music. As cars grow relatively less important, borrowers struggling to pay back their loans on time are increasingly prioritizing payments on the latest iPhone instead of making sure they hold on to their pickup or coupe.

The shift is increasing the attractiveness of bonds generated from mobile-phone loans, a small but growing portion of the asset-backed securities market. While just $7.7 billion of bonds backed by phone purchases have been issued since 2016 — and all by Verizon Communications Inc. — the number may increase over coming years.

“Payment priority of cell phones is higher than personal and auto loans and similar to or slightly lower than that of mortgage,” Ram Ahluwalia, the chief executive officer of PeerIQ, a New York-based provider of data and analytics for the consumer lending sector, said in an interview. “Now with Lyft and Uber, you can access transportation via cell phone. The car no longer is a central asset. Technological change is driving shifts in consumer behavior.”

There isn’t much breakout data available for mobile-phone loans because it’s a newer segment. But the above chart based on data from credit reporting agency TransUnion shows how the broader categories have shifted over the last five years.

“Back in 2008 cell phones probably weren’t as present as they are now and have moved up the scale,” said Ken Purnell, the head of ABS portfolio management at Invesco Advisers Inc., based in Louisville, Kentucky. “In the ABS market it gives investors another very high-quality type of security to invest in that didn’t exist two years ago.”

While the market is set for growth, so far there have only been six sales by Verizon, the largest U.S. mobile-phone carrier. Its bonds are backed by customers’ monthly device payments, which are usually bundled with their service bills. The spreads on the securities have tightened and are generally in line with prime auto debt.

“Surveys are showing that the cell phone payment is a high priority for the consumer, and from that perspective we think that fundamentally they are pretty sound,” said Clayton Triick, an Atlanta-based portfolio manager at Angel Oak Capital Advisors, which manages $8.5 billion. ”More recently, spreads have just validated that.”

Angel Oak sold its Verizon cell-phone bonds, but Triick said his team would consider buying similar securities in the future if there is an attractive entry point, perhaps when new issuers come to the market.

While AT&T Inc. and others have done short-term financing through phone loans, full-blown ABS haven’t yet materialized from Verizon’s smaller rivals. Purnell said mergers in the industry may have delayed the deals.

“We thought the size of this type of financing would grow faster than it has,” Purnell said.