Underwriting the Underwriters: Finding Opportunity in Consumer Loans

As banks continue to pare back financing activities, consumer lending is taking up more space in investors’ private credit allocations. Known as asset-based financing, this form of lending is the engine that powers the real economy, and we believe it has the potential to boost portfolio returns, reduce volatility and diversify existing exposure to corporate credit—both public and private.

But with interest rates set to stay higher for longer, is now the right time to add exposure to consumer debt? It’s a fair question—particularly in the US, where a recent Federal Reserve survey showed that some borrowers were falling behind on auto and credit card payments.

We think the answer is “yes,” and here’s why: Not all loans are alike—even when they’re made to borrowers with comparable credit scores and against similar collateral. For investors, the key consideration isn’t the type of loan or the near-term economic outlook, but the quality of the underwriting—a private lender’s assessment of a borrower’s creditworthiness and the quality of the loan.

In this sense, private credit investors are underwriting the underwriters.