Unemployment and Personal Loans: What's the Connection? |

As reported by the US Bureau of Labor Statistics recently, unemployment remains at a record high of over 10% for the first quarter of 2010; simultaneously, the number of personal loans continued a steady decline. The decline in personal loans comes at a time when other loan products, including auto loans, home loans, and cash advances, are experiencing growth. The fact that personal lending is on the wane just as other forms of lending are picking up is unusual and has led many financial analysts to wonder just what is behind the trend. Many conclude that the record high of unemployment is directly to blame for the decline in personal lending. Most of the people who are experiencing unemployment now are young people, typically the most “spendy” age group among consumers, and without an income, these consumers cannot afford a personal line of credit.

Why Personal Lending Is Linked to Unemployment

The decline in personal loans can partially be blamed on the economy; as the financial crisis deepened, banks cut back on most lines of credit, and the personal loan was one of the first to go. Because the majority of personal loans are unsecured, meaning they are made without collateral, they pose a greater risk to the lender if the borrower should renege on the deal. Borrowers, who are suddenly without an income, as happens when you are downsized, simply do not have the necessary capital it takes to prove to a bank that you can pay back a loan. That may be why credit cards continue to thrive; most people had a credit card before becoming unemployed and can use them to help pay bills during unemployment. It may also be the reason that cash advances are booming; since they require no credit check and can be used for the same purposes that you would use a personal loan for.

Why the Growth in Other Loan Products?

The growth in other loan products may be linked to two distinct trends. First, the rise in educational loans may be directly linked to the record high of unemployment; many people are not gainfully employed and so they are returning to school. The rise in other forms of lending, such as auto loans and home loans, may be the first tentative signs the economy is turning around. These loans typically pose less risk to the lender as they are long-term secured loans. Banks are more willing to begin lending these kinds of products since they know they will have recourse if the borrowers default. Personal loans, should they ever gain in popularity again, will probably be the last loan product to revive, signaling the end of the recession.