The Consumer Credit Market

Consumer credit is a broad term for loans extended to individuals to finance private consumption, as opposed to business or commercial credit. Consumer credit comes in many forms, including unsecured credit such as credit card balances, personal loans and “buy now, pay later” (BNPL) credit, as well as consumer credit secured by auto loans or mortgages. The debate over underwriting quality centers mainly on unsecured consumer loans, which are extended on the strength of the borrower’s personal obligation. These loans rely on an assessment of the consumer’s ability to repay (usually based on a credit score or payment history), and the lender has no right to seize a specific asset in the event of default. As a result, credit risk is higher than for secured loans, and interest rates and risk premia on consumer credit are correspondingly higher.

Affirm, one of the pioneers of BNPL, has reported that selling billions of dollars of loans to institutional investors such as Sixth Street and to insurers (Prudential, New York Life) was a key part of its growth plan. In addition, last November KKR renewed its agreement to purchase BNPL loans from PayPal, in a deal worth approximately $75 billion. Alongside this revival of the sector, dedicated players have also emerged. For example, Fidem Financial in the US, founded in 2018 by a former senior Bank of America executive, has since acquired around $15 billion of credit card debt and, together with Blue Owl, launched a venture that allows retailers to issue co-branded credit cards without a bank.

The main sub-categories of unsecured consumer credit are:

• Credit card financing: Revolving loans of an ongoing nature. Consumers tend to treat credit card debt as debt that must be serviced on a regular basis, partly in order to preserve access to their credit line. Historically, therefore, households have shown a relatively high willingness to repay credit card debt. On the other hand, in periods of severe economic crisis, credit card debt also suffers high default rates and can reach double-digit (percentage) losses.
• BNPL credit (short-term point-of-sale installment loans): A one-off loan or series of installments for a specific purchase. Unlike a credit card, which is an open line for repeated use, a BNPL loan ends after a fixed number of installments. The BNPL customer profile tends to be younger or lower in credit rating; in fact, many BNPL customers fall into the low-credit-score segment or have no long-term credit history.

Key risks for investors:

Investing in unsecured consumer credit carries tangible risks. First, cyclical risk: consumer loans are sensitive to macroeconomic conditions, above all to declines in employment and disposable income. When the economy weakens and unemployment rises, delinquencies and defaults on these loans increase noticeably. An investor entering consumer credit assets now is doing so late in the cycle, at a point when warning signs about credit quality are already appearing.

Second, underwriting risk and information asymmetry: the rush to do deals and the sharp increase in the volume of loans being purchased raise concerns about underwriting standards. When private credit funds buy loans originated by banks, an information gap may arise between the originator and the buyer of the debt. Traditional lenders may have sophisticated credit models built on decades of data, while the new funds rely on partial historical data or optimistic assumptions. In addition, there is a moral hazard in the “originate-to-distribute” model: if the credit originator knows in advance that it can quickly sell the loan to an investor, its incentive to underwrite rigorously diminishes. The implication is that the loan buyer may be bearing more risk than it estimates.

Third, the ability to closely monitor loan performance is lower than that of the underwriters. Institutional investors entering the sector usually rely on periodic reporting and historical data, which may delay the detection of adverse changes. Performance data inherently arrives with a lag, so signs of deterioration will only appear after the problem is already developing. In addition, newer products (such as BNPL) lack a long track record, so there is greater uncertainty about how they will perform in a crisis. A private credit fund may therefore discover only in hindsight that its assumptions were too optimistic.

Beyond these risks, there is also a risk related to the quality of debt servicing and collections: collecting consumer debt requires a specialized infrastructure. The new entrants in the sector are still inexperienced and lack an experienced debt-handling operation, or that operation is managed by a third party, which can lead to additional costs. In an economic downturn, recovery rates on unsecured loans depend materially on collection capabilities, so mistakes in this area can lead to heavy losses.

In summary, the strong trend of private credit funds entering consumer credit reflects a structural shift in the financial world: private capital is filling a void left by banks and channeling funding into consumer lending. The trend stems from a combination of factors: more conservative bank regulation, capital allocation considerations, and the search for attractive yield. On the one hand, consumer credit assets offer attractive returns in a high-rate environment and are supported by fundamental demand in the economy, as consumers continue to need credit, whether it comes from banks or from non-bank lenders. On the other hand, a cautious approach is required, one that recognizes that high returns reflect high risk, so manager selection may prove critical to long-term investment success in this sector.

Disclaimer:

Nothing in this publication constitutes an offer to the public or an invitation to invest of any kind; it is a publication and presentation of general information only. The article and its content rely on information, publications and data received from third parties, which were assumed to be accurate without the company having examined or verified their accuracy. The information presented in this publication does not constitute investment advice/marketing or a substitute for investment advice/marketing tailored personally and specifically to each individual, taking into account their data, needs, financial position, circumstances and investment objectives.

Sources:

Financial Times, Indap S., Quinio A. (Dec 2025), Private credit firms pile into consumer debt as risk-taking mounts.

Reuters. (2025, November 17). KKR to buy up to $75.4 billion of PayPal’s European BNPL loans in renewed deal. Reuters. https://www.reuters.com/business/kkr-buy-up-754-billion-paypals-european-bnpl-loans-renewed-deal-2025-11-17/.