This year has been a year of unknowns. For financial institutions, marketers and everyday consumers, 2020 has presented challenges that are simply enormous. And as we look forward to 2021 — which, in its best-case scenario, offers a long-awaited return to normalcy — it seems like there’s no such thing as a prediction these days that’s too bold, crazy or straight-out-of-a-dystopian-fiction-novel.

What we know is that 2020 turned consumer lending on its head. The changes in consumer lifestyle and expectations we’ve witnessed could reshape lending for years to come.

So, what will 2021 look like for both lenders and borrowers?

Let’s look at a few trends we’ve seen over the past several months to better understand the landscape of where we’re headed.

Lending in 2020: the key takeaways.

Bank deposits grew at twice the rate of loans this year.
Over the first two quarters of 2020, total bank deposits grew 22.3%. That’s a full six times more than the annual growth rate from 2017 to 2019. Total loan growth saw an uptick as well — powered by mortgage refinancing and Paycheck Protection Program (PPP) loans — but at just 14.9% (three times its 2017 to 2019 growth rate), it couldn’t keep pace with deposits.(1) And without refis or PPP loans, growth would have been negative.

For credit unions, annualizing the first two quarters of 2020, total median credit union deposits grew 21.8%. That’s 10 times higher than the median 2017 to 2019 annual growth rate, while loan growth dropped 3.4% over that same time.(2)

This marks a sudden, sizable shift in financial institution balance sheets. There’s now an even deeper need for loans. But in a market where qualified loan demand is on the decline, this is a tough ask — especially for institutions with limited marketing resources on cost-saving pandemic budgets.

Low mortgage rates are driving a shift toward refinancing.
With the 30-year fixed mortgage rate reaching historic lows — its lowest rate on record since 1971(3) —consumers realize it makes sense to refinance. Especially at a time when household finances are tight, people don’t want to overpay in interest if they don’t have to.

A longer-term also lets them put more money back in their pocket today, giving them the flexibility to ride out hard times or make overdue home improvements with the work-from-home shift. And consumers are now actively seeking products to help them refinance.

Google search volume for March 2020(4)

• “Personal loan refi” — 2x year-over-year increase.
• “Auto loan refi” — 1.8x year-over-year increase.
• “Mortgage refi” — 7.7x year-over-year increase.

While business lending surged, consumer lending sank.
As small businesses flocked to relief with PPP loans, commercial and industrial loans have seen 44.1% growth in 2020.1 However, that trend couldn’t be more opposite for consumers — with a sharp retraction in consumer lending and credit cards.

In fact, mortgage and auto loans have been the only lifelines of growth for consumer loan portfolios — up a modest 1.3% and 0.8%, respectively. Still, these gains were nowhere near enough to offset losses for credit card (-28.3%), home equity (-10.3%), and other personal loans/lines of credit (-0.8%).(1)

New players are originating more mortgages than ever.
Banks and credit unions aren’t just competing against each other anymore. This isn’t a new trend. It’s a longtime reality that’s only accelerating with today’s new wave of digital transformation. Non-bank lenders first overtook bank and credit unions with more than 50% market share back in 2017.(5)

This rise in competitors from big tech, to fintech startups, to nontraditional lenders is saturating an already narrowing environment for banks and credit unions to find profitable new loans. And many of these newer competitors are more experienced in navigating the digital-first way of doing things that every institution has been forced to adopt in 2020.

Lending predictions for 2021: the road ahead.

Refinancing is projected to drop by 46%.
Yes, it’s still a pretty great time for consumers to refinance. But the current pace of refis we saw in 2020 is simply unsustainable. At this point, the majority of rate shoppers who are actively looking to refinance already have. That leaves consumers who aren’t currently thinking about refinancing or necessarily paying attention to the rate environment. Refinancing could still make sense for large numbers of consumers, but it won’t be low-hanging fruit anymore.

The Mortgage Banks Association also expects the 30-year fixed-rate mortgage to rise to 3.3% in 2021 (up from the 2020 rate of 3%), in which case they forecast refinance mortgage originations will drop more than 46% next year.(6)

Consumer lending and credit cards can expect a slower recovery.
Outside of an immediate government injection of cash — i.e., a stimulus package — growth should be steady, but slower than in recent years.

If there’s a market recovery, both consumer lending and credit card lending should pick back up — however, not necessarily at the same rate debt is paid off. And the flip side of any new stimulus package would be a reduction in credit card debt (as happened on the heels of the 2020 stimulus).

Though we’ve already seen a huge rebound in the job market since March, the overall change in employment (now close to -7%) is still lower than the change in employment over the course of the 2007-2009 recession (-5%).(7) And after an initial hiring V-shaped spike, that curve is starting to plateau.

Qualified borrowers could be hard to come by.
Given the current state of the economy, while demand for consumer loans should stay high, the quality of eligible consumer loans might not. There’s been a massive amount of job rotation with a cycle of openings and shutdowns this year — a trend that could continue at least until a COVID vaccine is fully distributed.

As a result, job verification services will prove more crucial than ever to mitigate lending risk and bring in qualified borrowers. And you can expect there to be elevated amounts of loans in hardship among affected borrowers, barring a stimulus.

Auto loans remain a source of high-quality loans.
One reliable avenue to qualified borrowers has been the auto loan market. Not only did new auto loans grow in 2020, auto loans in hardship went down overall — driven by a large decrease of loans in hardship for prime and super-prime (the highest-rated) borrower. According to TransUnion, from July 2019 to July 2020, the distribution of prime plus loans in hardship fell from 16% to 12%, while super-prime hardships dropped from 23% to 14%.(8)

This growth in high-quality loans is in part thanks to borrowers capitalizing on captive finance offerings — the 0% financing deals you see offered through Ford, Toyota, Honda and other major automotive manufacturers. Looking forward to 2021, prime and super-prime borrowers will likely continue leveraging these captive financing promotions and steadying the auto loans market overall.

Fintech lenders will attract more loans. And better loans.
Not only are fintech lenders increasing their market share of total loans originated — they’re moving up credit tiers. They’re moving into auto loans. They’re going full mainstream.

In the early days, fintech lending was relegated to lower tiers of credit, taking on the loans no one else wanted. But now, as marketplace lending gains in popularity and consumers go online first to find the best offer, fintech lenders are consuming more and more of the A- and B-paper loans that banks and credit unions need on their balance sheet.

How can you stay ahead of these trends in 2021?
If you’re one of the banks and credit unions across the country who still need loans, you’re far from alone, the competition is tough, and the environment is tight. To compete, you need to create a competitive advantage for your lending products and meet consumers where they are (online). There are more loan options than ever. What would motivate them to choose yours?

Transparency, flexibility, peace-of-mind — now is the time to provide value that goes beyond just a competitive rate. Give consumers a reason to choose your loan. And if not as many new loans are available (and marketing budgets to target new customers are limited), give your best existing borrowers more reasons to deepen their relationship.

The fintechs are coming harder and faster than ever, but they don’t own innovation. Now is the time to re-evaluate your existing loan offerings before it’s too late.