Brocker.Org: Americans might be paying their debts backwards

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Faced with a difficult choice between making a mortgage or a car
payment, one might think the mortgage would come first.

But consumers with multiple loans are actually
prioritizing auto loans  — and even smaller loans —
ahead of their homes, according to a new study.

A TransUnion study showed that unsecured personal loans —
unsecured meaning there is no collateral for the borrower to lose
if they fail to pay — have lower delinquency rates
than auto loans, mortgages, and credit card debt for
consumers that have all four types of loans. The study
encompassed 
roughly 2 million consumers with
this credit profile.

The research contrasts with conventional wisdom, which
suggests that borrowers are more likely to prioritize secured
credit lines, so as not to risk losing a house or a car. Research
from UBS suggests that
stressed households are likely to default on credit card debt
first
, ahead of a car loan or a student loan, for
example. 

So why would someone choose to pay an unsecured loan over their
mortgage or car payment?

“We conjecture that personal loan borrowers may feel they
can get a quick win with these loans even when they are
struggling, and there is a clear, near-term end to the
obligation—a ‘light at the end of the tunnel,’ in a sense,” said
Ezra Becker, senior vice president and head of research for
TransUnion’s financial services business unit.

The average term lengths are much shorter for unsecured personal
loans, according to TransUnion data. Personal
loans taken out in the last quarter of 2016 had a term of 28
months on average. Compared to terms for auto loans and mortgages
— 60 months and 230 months, respectively — personal loans offer
the quickest route to eliminating a loan from their balance
sheet.

The study also showed a steady rise in personal loan delinquency
rates — 1.49% in 4Q 2016, up from 1.10% in 2012 — but there
may be a silver lining there. Rising delinquency rates can
actually be a good sign for the economy. As personal loan lenders
expand their customer base to include people with lower credit
ratings, it’s natural for the delinquency rates to rise.
It’s a sign of capital being more accessible to more people.

For these consumers with all four types of credit debt, auto
loans had the second lowest delinquency rate, with mortgages in
third and credit cards in fourth. That is consistent with the
overall trends from past TransUnion consumer studies since 2004.

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