Alternative Credit: The Rise of Consumer Lending

Consumer lending has rapidly evolved from traditional mortgages and auto loans into a complex and diversified subasset class within the broader private credit space. Technological innovation, shifting consumer behavior, and the rise of online platforms have facilitated access to credit and enabled more granular exposure to individual credit risk. This sector now includes not just mortgages and personal loans but also novel structures like buy-now-pay-later (BNPL) and payday loans, which offer a broad array of products with different risk–return profiles.

At its core, consumer lending’s appeal for investors lies in its large and diverse addressable market (more than €27 trillion globally). Different consumer lending opportunities tend to have low correlation with each other, while the asset class typically has limited correlation to public markets, making it an attractive diversification tool. Through securitization, consumer loans are typically bundled into asset-backed securities (ABS) and are sold in tranches with varying levels of risk, typically offering amortizing cash flows. These structures are supported by guarantees that include overcollateralization, excess spread, and dynamic triggers.

Key performance drivers include borrower credit quality, interest rates, and prepayment behavior — on top of broader macroeconomic conditions that affect consumers. Importantly, each subsegment (e.g., auto loans, credit card receivables, student loans, BNPL) exhibits distinct characteristics. For example, auto ABS benefit from tangible collateral, and credit card loans offer liquidity and high turnover.

Institutional investors typically access this space through ABS and private credit funds, while retail participation is growing through vehicles like European long-term investment funds, long-term asset funds, and exchange-traded funds. From a manager’s perspective, success in consumer lending requires rigorous underwriting, robust servicing, regulatory compliance, and active monitoring of structural protections and borrower performance.

In an increasingly volatile and concentrated market environment, consumer lending provides both yield and resilience. Yet, as the space matures, investor vigilance is crucial, especially with newer products for which risk metrics and regulation are still evolving. Lately, concerns have been increasing about phantom debt and potentially tighter regulation when it comes to BNPL.

Ultimately, consumer lending may potentially offer stable returns, portfolio diversification, and potential alpha opportunities. But this subasset class also requires skilled asset selection and risk management from experienced underwriters as well as increased investor education and sophistication.