Americans might be paying their debts backwards

Faced with a difficult choice between making a mortgage or a car payment, one might think the mortgage would come first.

But consumers with multiple loans are actually prioritizing auto loans — and even smaller loans — ahead of their homes, according to a new study.

A TransUnion study showed that unsecured personal loans — unsecured meaning there is no collateral for the borrower to lose if they fail to pay — have lower delinquency rates than auto loans, mortgages, and credit card debt for consumers that have all four types of loans. The study encompassed roughly 2 million consumers with this credit profile.

The research contrasts with conventional wisdom, which suggests that borrowers are more likely to prioritize secured credit lines, so as not to risk losing a house or a car. Research from UBS suggests that stressed households are likely to default on credit card debt first, ahead of a car loan or a student loan, for example.

So why would someone choose to pay an unsecured loan over their mortgage or car payment?

“We conjecture that personal loan borrowers may feel they can get a quick win with these loans even when they are struggling, and there is a clear, near-term end to the obligation—a ‘light at the end of the tunnel,’ in a sense,” said Ezra Becker, senior vice president and head of research for TransUnion’s financial services business unit.

The average term lengths are much shorter for unsecured personal loans, according to TransUnion data. Personal loans taken out in the last quarter of 2016 had a term of 28 months on average. Compared to terms for auto loans and mortgages — 60 months and 230 months, respectively — personal loans offer the quickest route to eliminating a loan from their balance sheet.

The study also showed a steady rise in personal loan delinquency rates — 1.49% in 4Q 2016, up from 1.10% in 2012 — but there may be a silver lining there. Rising delinquency rates can actually be a good sign for the economy. As personal loan lenders expand their customer base to include people with lower credit ratings, it’s natural for the delinquency rates to rise. It’s a sign of capital being more accessible to more people.

For these consumers with all four types of credit debt, auto loans had the second lowest delinquency rate, with mortgages in third and credit cards in fourth. That is consistent with the overall trends from past TransUnion consumer studies since 2004.