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From rate cuts to AI – 5 trends that will redefine lending in 2025

By Gloria Methri

January 14, 2025

  • AI in lending
  • America
  • consumer debt management
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lending, loans, As we step into 2025, the lending landscape is gearing up for a transformative year. With key economic indicators showing signs of stabilisation, financial institutions are looking at fresh opportunities to diversify their balance sheets and strengthen their position in the market.

Rate cuts drive this shift, evolving consumer debt management strategies and the rapid adoption of AI in lending decisions. Happy Money, a US-based consumer finance company, has laid out five key trends that will dominate the lending landscape in 2025.

  1. Lending Strategies to Strengthen Post-Fed Rate Cuts

With two rate cuts already implemented by the US Federal Reserve, the era of rising interest rates appears to be coming to a close. Financial institutions, including banks and credit unions, will find themselves in a more stable environment to pursue growth. The falling rates are expected to stabilise deposits and loan-to-share ratios, providing more capacity for lenders to return to growth mode.

In 2025, financial institutions will look to optimise their portfolios, solidify their lending strategies, and ensure they can continue to offer intense borrower experiences while focusing on responsible growth. Institutions that prepare now will be poised to make intentional moves that provide consumers with better financial outcomes while growing their balance sheets.

  1. Indirect Auto Loans Continue to Decline

Indirect auto loans, mainly through credit unions and community banks, will continue to experience a decline next year. The business model, which involves thin margins and the disintermediation of lenders, has been increasingly complex in the current financial environment. With rising deposit costs and growing competition, financial institutions will seek alternative ways to diversify their portfolios and generate returns.

Smaller and medium-sized banks, in particular, will need to focus on strategies that can deliver attractive risk-adjusted returns while avoiding the pressures of indirect auto lending. As the market adjusts, we can expect to see institutions shifting their attention toward asset classes with higher yield potential.

  1. Inflation’s Lingering Impact on Consumers

While inflation has started to moderate and trend toward the Federal Reserve’s target of 2%, consumers are still feeling the pinch at the cash register. The effects of inflation have already strained household budgets, leaving consumers with fewer resources to cover daily living costs. For many, credit usage and savings have been significantly depleted, and managing household balance sheets will remain a top priority in 2025.

In response, financial institutions must develop tools to assist consumers in better managing their budgets and cash flow. Lending solutions that help ease the burden of high-interest debt—especially credit card debt—will become more critical. Lenders who innovate around these challenges and offer practical, budget-friendly solutions will earn consumer trust and loyalty.

  1. Debt Consolidation Becomes a Priority for Consumers

As inflation and high interest rates continue to shape financial decisions, many consumers are finding themselves overwhelmed with rising debt. U.S. credit card debt has hit an alarming $1.14 trillion, with credit card APRs hovering near 23%. In contrast, consumer unsecured loan rates are approximately 7.5% lower than credit card APRs, creating a stark difference in debt-servicing costs. This trend has led to an increasing number of consumers seeking ways to consolidate high-interest debt, especially credit card balances.

Refinancing credit card debt into unsecured personal loans could save U.S. households over $80 billion annually. In 2025, more financial institutions will take action to offer tailored solutions that help consumers streamline their debt and regain control of their finances. This shift represents a significant opportunity for lenders to make a positive impact on consumers’ financial health while growing their portfolios.

  1. AI and Risk Management: A Powerful Partnership

As we move into 2025, AI-driven decision-making will become increasingly common in the lending industry. By leveraging AI tools, lenders can enhance their risk management processes, improving returns and optimising credit decisions. However, while AI presents significant potential, it must complement sound risk management strategies rather than replace them entirely.

Regulatory bodies are already working to implement more stringent standards for the use of AI in lending. Institutions will need to ensure they comply with these evolving standards while maintaining a solid understanding of their risk policies and credit culture. The successful integration of AI into lending strategies will depend on financial institutions’ ability to balance innovation with compliance and risk mitigation.

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