Against the backdrop of rising unemployment in large economies such as the US, private credit funds are gradually becoming important players in the consumer loan sector.

These companies used the opportunity of banks to tighten credit policies to buy consumer loans on a large scale. Consumer debt such as “buy now, pay later” (BNPL) and traditional credit cards have become popular assets for private credit funds.

These companies are eyeing the potential benefits of consumer loans in the midst of economic uncertainty, although this also comes with a higher level of risk.

Patrick Lo, partner and co-chief investment officer at Waterfall Asset Management, said, “Consumer loan transactions have only really taken effect since the US banking crisis last year.

Consumer loans are expanding rapidly, and risks are increasing day by day

But as retail clients enter this emerging asset class, J.P. Morgan Chase CEO Jamie Dimon warned that if problems occur in the private credit sector with a market size of more than 1 trillion dollars, the consequences will be serious.

In times of economic weakness, people's demand for loans will increase, which provides investment managers with investment opportunities. However, poor economic conditions also mean that borrowers are more likely to get into financial trouble, increasing the risk of loan default.

Analysts believe that unlike corporate loans, which usually use physical assets such as real estate as collateral, consumer loans often have no collateral. This means that once the borrower is unable to repay the loan, it will be difficult for the lender to recover the debt by selling off collateral assets.

Also, consumer loans have a higher risk of default. This is because the high interest rate environment and downward pressure on the economy may reduce consumers' ability to repay their debts, thereby increasing the risk of loan default.

Experts warned that judging from some indicators, the credit card delinquency rate in the US has risen to the highest level in more than a decade. According to a survey conducted by Harris Poll (Harris Poll), about 43% of those who owe money for BNPL services say they are in arrears. More than a quarter of respondents said they are in arrears on other debts due to their BNPL expenses.

Analysts believe that the current influx of large amounts of capital into the consumer loan market, particularly in emerging fields such as BNPL, has led to increased competition and may cause problems such as lowering credit standards and easing risk control.

“Funds can never compete with banks' financing terms,” said Nikolas Tourkas of APS Holding, a non-performing debt expert. “There is always a risk of lowering credit standards during the launch process.”

Despite some risks, more and more capital flows into the private credit market due to the rapid development of asset-based finance. According to the forecast of Atalaya Capital Management (Atalaya Capital Management), the scale of private credit investment is expected to more than double to 900 billion dollars in the next few years.