Opportunities for Loan Growth Still Exist in 2023 Despite Macroeconomic Challenges

Following a two-year streak of strong growth in nearly all loan originations – one in which a broader and more diverse array of consumers gained access to credit – the auto finance, credit card, mortgage and personal loan markets are likely to slow down in 2023, under the weight of higher interest rates and continued higher than normal inflation.

But this doesn’t necessarily mean stagnation when it comes to lending. Despite a challenging macroeconomic environment, consumers remain optimistic about the economy as a whole. TransUnion’s recent Consumer Pulse study found that more than half (52%) of Americans are optimistic about their financial future during the next 12 months. The youngest generations – millennials (64%) and Gen Z (61%) – are most optimistic.

However, that optimism is very much tempered, as 82% of consumers believe the U.S. is currently in or will be in a recession before the end of 2023. This portends a climate in which consumers are likely to continue to seek opportunities to borrow, and banks will likely continue to have opportunities to lend.

In fact, when asked, about one in four Americans (26%) surveyed in the Consumer Pulse study reported plans to seek new credit or refinance in the next year. Of those, 53% plan to apply for a credit card – more than double all other credit types: Car loan/lease (23%), personal loan (22%), mortgage (17%), new HELOC (14%) and refinance mortgage (14%).

Certainly, we may see a step back from some of the record highs we’ve seen among certain loan origination types. Credit card originations will likely tick down from their projected record highs of 2022, but should still remain above pre-pandemic levels. Personal loans as well will likely come down some from recent highs but should still remain strong and at similar levels to those found immediately before the pandemic. While mortgage purchase and refinance originations are also expected to decrease somewhat more significantly due to current interest rates, there should still be ample and robust opportunities for home lenders in 2023.

One example of this opportunity can be found in home equity originations, which TransUnion forecasts to continue to grow in 2023; in fact we expect them to increase by 24% for the year. Two big factors lending to this increase will be the amount of tappable equity that owners will have access to, which will remain strong despite a potential small downtick from record highs in 2022. This is accompanied by an increasingly strong desire by many homeowners to use their equity to pay down higher-interest-rate debts.

Activity in auto lending is also likely to pick up this year. After 2022 saw a decline in the number of auto loan originations, largely due to supply chain issues and vehicle availability, we expect auto originations to rebound in 2023, with an increase of around 5% year over year.

It’s also worth noting that, despite continued demand for lending products, we do anticipate delinquencies to rise in 2023 after a long stretch of historic lows. Consumers 60-plus days past due on their credit cards, for instance, will likely rise nearly 3% over the course of 2023, and delinquency numbers across the board merit watching throughout the year. Despite 2023 presenting a lending climate that poses additional risk, the opportunity for lending need not be ignored but rather, should be paired with more data when making lending decisions.

This climate of enhanced risk may well result in many lenders viewing potential borrowers, regardless of loan product, with more scrutiny. The amount of data used to make decisions in the economic environment of 2022 will likely not suffice for lenders in the more challenging climate we anticipate for 2023. It will be important for lenders to use additional tools and resources to determine lending risk with the greatest accuracy – for example, trended data, which can allow lenders to better understand consumer behavior over time, rather than simply in a snapshot of the present day. This can help to determine a more accurate risk score and determine those that meet specific criteria.

Ultimately, 2023 is expected to be a challenging year for lenders and consumers alike, but despite those obstacles, it still comes with a plethora of new opportunities. The key is using the right data, and the right tools, to unlock them.

Jason Laky is EVP for TransUnion, a Chicago-based global information and insights company.