The global consumer credit reporting agency, TransUnion, recently published an alarming report about consumer debt, projecting a 32% year-over-year increase in unsecured personal loan originations for subprime consumers in the third quarter of 2026.
Total subprime loan balances have risen to a record $270 billion.
So, why does this seem so concerning? Let’s dive in.
Subprime borrowers, lower-income consumers with low credit scores, account for about 40% of these unsecured personal loans, using them as a stopgap to manage rising living costs.
There are currently 25 million consumers with unsecured personal loans, with an average balance of more than $8,400, and U.S. credit card debt hit a record $1.28 trillion with 174 million Americans carrying balances averaging more than $6,500.
You can start seeing problems.
CNBC personal finance writer Sharon Epperson noted that personal loans are often being used to pay off credit card balances, but those same consumers keep on using credit cards, rack up big new balances, and in six months 40% have to take out a second personal loan.
These consumers are caught up in a vicious cycle that may be difficult or even impossible to unwind.
Fintech lenders that have a 42% share of personal loan originations make it easy to apply online, and seem more than happy to make these loans.
But delinquency rates (60-plus days past due) are more than 11% even while the economy is strong and unemployment is historically low. So what happens if economic growth slows and jobs weaken?
I did some digging to find out who buys these subprime personal loans, and it appears many of them are “securitized” and sold to institutional fixed-income investors — asset managers, hedge funds, insurance companies, etc. that hope to capture higher interest rates, often relying on “tranches” structures to try to manage default risk.
Sadly, I recall seeing this movie before with the subprime mortgage loan frenzy two decades ago. This ended badly for almost all concerned: buyers were unable to make mortgage payments as interest rates rose and many lost their homes; investors lost money on the mortgage-backed securities they bought; the economy went into the Great Recession; and stock markets tanked.
Most Americans may not really understand how bad it got, but the big banks did. Michael Lewis’ book, The Big Short, clearly showed how scary things got, and the incredible plan Fed chairman Ben Bernanke and Treasury Secretary Hank Paulson created to prevent a true financial meltdown.
“It is inevitable that anyone who can borrow freely to cover errors of management will borrow rather than correct the errors.”
Henry ford
The only winners were the few maverick investors who “read the tea leaves” and made massive short bets against the market.
Hopefully, this problem is not as severe as the subprime mortgage debacle, but it’s never too late to do something about it.
Banking regulators can tighten lending standards; making loans to consumers who cannot afford to pay them back is bad business for all concerned.
And caveat emptor (“buyer beware”) should be the watchword for investors. These loans are called subprime and carry high interest rates for a reason, reflecting high risk.
That risk could quickly get worse if we see a recession. Wall Street and rating agencies thought they understood subprime mortgages, too, so caution today seems prudent.
Finally, there is a crying need for financial literacy. Consumers need to be taught about budgeting, living within their means and how to use credit responsibly.
It is painfully clear that too many Americans do not have the basic knowledge needed to manage their financial affairs.
The affordability crisis for lower-income folks is real, but taking out personal loans to pay off credit card debt and then creating new credit card balances just makes things worse.
Free credit counseling and debt assistance in Santa Barbara is available through nonprofit organizations, legal aid and specialized credit unions. Top local resources include the Legal Aid Foundation of Santa Barbara County, United Way of Santa Barbara County, Santa Barbara County 211 and others.
Get help if you need it, and direct others to get help if they need it. Let’s all be smart about using credit.
