Last year, consumer credit card debt surpassed $1 trillion. After strong spending during the holiday season, Americans now owe $1.13 trillion on their credit cards, according to a new report on household debt from the Federal Reserve Bank of New York.
Credit card debt is burdensome for consumers, and with credit card interest rates at all-time highs, many may look into consolidating their debts through personal loans. According to one survey, 38% of consumers are considering consolidating their debt, which can help simplify their finances and save on interest. If interest rates fall meaningfully in the next year or two, LendingClub (LC 1.00%) could benefit from a "historic refinance opportunity."
Consumer credit card balances are rising alongside high interest rates
The U.S. economy has displayed incredible resilience, relative to what experts expected. Entering last year, 80% of economists believed the U.S. economy would enter a recession in 2023 or 2024. However, a resilient economy over the past year has now led many to believe the chance of a recession is relatively low.
Part of what drove strong economic numbers last year was robust consumer spending, aided by the increased use of credit cards. Consumers have racked up a significant amount of debt over recent years. In the fourth quarter, strong holiday spending and higher credit usage increased card balances by 14.5% year over year, bringing total consumer debt to $1.13 trillion by the end of last year.
Consumers are racking up credit card debt at a time when interest rates are quite high as the Federal Reserve looks to put a damper on inflationary pressures. According to Fed data, interest rates on credit cards went from an average of 14.6% to 21.5% since the central bank began raising its benchmark interest rates.
U.S. credit card debt data by YCharts.
LendingClub could provide relief
Consumers are feeling the pinch. According to the New York Fed, credit card debt in serious delinquency (90 days or more past due) rose from 4% at the end of 2022 to 6.4% by the end of last year. With credit card debt balances so high, individuals are turning more to companies to help refinance or restructure their debt with lower interest rates.
That's where LendingClub enters the picture. Founded in 2006, the company started as a peer-to-peer lending platform. After facing scrutiny in 2016 for its lending practices, new management shifted the company's strategy. In 2021, LendingClub acquired Radius Bancorp, providing it with a low-cost deposit base that enabled it to hold high-quality loans on its books, which provided it with net interest income.
LendingClub aims to hold on to about 15% to 25% of its highest-quality loans while selling the remainder in the open market. When it sells these loans, it earns marketplace revenue, including origination fees from borrowers and servicing fees sold to investors. For loans it holds on its books, the company earns net interest income over the life of that loan.
How LendingClub is preparing for a "historic refinance opportunity"
LendingClub Chief Executive Officer Scott Sanborn told investors during the company's fourth-quarter earnings call that "we've been preparing our personal loans franchise to meet the historic refinance opportunity ahead." The company is developing tools to help consumers monitor and manage their debt.
It's also developing products that allow members to sweep credit card balances into payment plans. This will enable members to "top up" an existing personal loan, making it easy for members to secure additional funds to maintain a single payment on their consolidated debt.
Lending Club price-to-earnings ratio (P/E) (Forward 1y) data by YCharts.
Consumers may be inclined to consolidate their loans, especially if interest rates fall from recent multi-decade highs. If that's the case, LendingClub will be sure to benefit. Now could be an excellent time to scoop up shares, which are cheaply priced at an 18% discount to tangible book value and 11 times forward earnings, ahead of this historic refinancing opportunity.
