Rate cuts, balance sheet diversification and consumer deleveraging will shape the lending landscape next year
High interest rates, staggering consumer debt and technological advancements shaped a complex lending landscape this year. Happy Money, a leading consumer finance company, has outlined key trends expected to impact the lending industry in the year ahead. The big takeaway: Financial institutions and lenders will be looking to put their capital to work in ways that diversify their balance sheets while helping consumers reach their financial goals.
Lending strategies will solidify following Fed rate cuts. With two rate cuts so far this fall, the Fed has signaled the end of the rising rate cycle. Falling rates will stabilize deposits and loan to share ratios, providing more capacity for financial institutions to get back into growth mode. Those who want to get ahead of the curve will look to solidify their lending strategies to power responsible and intentional growth, optimize their portfolios and provide strong borrower experiences.
Indirect auto loans will continue to decline. The decline in indirect auto loans, especially across credit unions and community banks, will persist next year. After all, indirect auto lending is a tough business, with razor thin margins and disintermediation of banks and credit unions. Instead, institutions will turn to other avenues to diversify balance sheets and gain assets with an attractive risk-adjusted return. This is especially important as increased deposit costs and accelerated competition will put net interest income under pressure for small and medium-sized banks.
The pain of inflation will persist. While inflation has moderated and will continue toward the Fed benchmark level of 2%, consumers won't see real relief at the cash register or related to their living costs in the near term. Diligent management of their individual and household balance sheets becomes even more critical as they have consumed a significant portion of their credit and savings. Consumers will need to make trade-offs or restructure their balance sheets to manage cash flow until the point that their income catches up to the level prices reached in the recent inflationary period. Financial institutions should focus on tools to help consumers manage their budget and products that help them more effectively manage their cash flow and reduce the burden of high-interest debt.
Consumers will look for support in consolidating their debt. High-interest rates and inflation have caused credit usage for short-term needs to skyrocket this year, bringing U.S. credit card debt to a staggering $1.14 trillion, with average credit card interest rates sitting at a record high of nearly 23%. By contrast, consumer unsecured loan rates are roughly 7.5% lower than that of credit card APRs, with those high credit card APRs likely to linger. This discrepancy represents the highest spread between personal loans and credit card interest rates in recent history. In response, an increasing number of consumers will look to deleverage and reduce their financial stress by paying off high-interest credit card debt next year. In fact, refinancing credit card debt into unsecured personal loans could save U.S. households over $80 billion annually. More financial institutions will take action to help consumers streamline their debt and achieve their financial goals in the coming year.
Risk management meets AI in lending. Should consumer strength hold up as is expected in a soft-landing scenario, credit performance will continue to improve risk- adjusted returns. Lenders will also look to improve returns through the use of smarter technology. AI-driven decision-making in finance will become more commonplace next year; however, it cannot and should not replace sound risk management. Regulators are setting more rigorous standards to oversee risk in AI tools, and financial institutions must be prepared to quickly adapt. A solid understanding of an institution’s risk policy and credit culture will be critical to effectively and compliantly explore AI.
“In 2025, there is a notable opportunity for credit unions, banks and asset managers to fortify their lending strategies and help consumers make a real impact on their financial health and happiness,” said Matt Potere, CEO of Happy Money. “The institutions that heed these trends and respond accordingly will be well positioned to not only help people reach their goals through responsible lending but also diversify and grow their balance sheets through assets with an attractive risk-adjusted return.”
About Happy Money
Happy Money is a consumer finance company that empowers people to achieve their goals through responsible lending. With its fully-digital platform, Happy Money partners with credit unions, banks and asset managers to originate high-quality loans, unlocking balance sheet diversification and scale.
Backed by leading investors like TruStage Ventures, Happy Money provides a turnkey acquisition, underwriting and originations channel for financial institutions to grow as a force for good in their communities. Together with their capital partner network, Happy Money has originated over $6 billion in loans representing more than 300,000 individuals who have taken greater control of their financial futures. Learn more at happymoney.com.