Unicus' Ganapathi: 20-30% of consumers who took on holiday debt last year are still paying it

Key Concepts

• Consumer Spending Habits: Shift from splurging to obligation/guilt-driven spending, with early holiday shopping starting in August.
• Consumer Credit: High reliance on credit cards and Buy Now, Pay Later (BNPL) services for holiday purchases, with significant carryover debt from previous years.
• Delinquencies: Rising rates in auto loans (highest since 2010) and credit cards (7.1%, highest in 14 years).
• Market Perception: Current market indifference to rising delinquencies, with a potential "hangover" expected in the first half of 2026.
• Labor Market Softening: Anticipated increase in layoffs in 2025, leading to a spike in delinquencies and charge-offs in 2026.
• Consumer Segmentation: Bifurcation between higher-income consumers (>$100,000) trading down to discount retailers and near-prime consumers facing significant credit challenges.
• Near-Prime Consumers: Defined as households with incomes roughly between $100,000 and $200,000, experiencing high delinquency rates.
• BNPL Business Model: Short-term benefit from increased consumer reliance, but long-term concerns due to "kicking the can down the road" and reliance on private credit funding.

Consumer Spending and Credit Strain

The current holiday season is characterized by consumers spending out of obligation or guilt rather than genuine splurging. Statistics indicate that 52% of consumers are making purchases due to some form of obligation or guilt. This spending trend has been ongoing, with some consumers beginning their holiday shopping as early as August. A significant concern is the persistent debt from last year's holiday spending; 28% to 31% of consumers who used credit cards for holiday purchases in the previous year are still paying off that debt and are expected to accumulate more this year. This holiday cheer is largely being financed through credit cards and Buy Now, Pay Later (BNPL) services.

Stock Market Implications and BNPL

From a stock market perspective, the increased reliance on credit cards and BNPL services presents a mixed outlook. BNPL companies such as Affirm and Klarna are expected to benefit in the short term as consumers increasingly turn to these platforms. Approximately 30% of consumers are opting for BNPL to finance their holiday shopping, especially those who have reached their credit card limits.

Rising Delinquencies and Market Indifference

There are concerning trends in consumer credit delinquencies. Auto loan delinquencies are at their highest point since 2010, and credit card delinquencies have reached 7.1%, a 14-year high. Despite these figures, the market appears largely unconcerned, treating these as non-critical issues for now.

The "January Hangover" and Future Economic Outlook

Fox Ganapathy of Unisys Research warns of a potential "hangover" in the first half of 2026. This outlook is tied to the anticipated increase in layoffs, with projections of over a million layoffs in 2025. If the labor market continues to soften into 2026, a significant spike in delinquencies and charge-offs for both auto loans and credit cards is expected.

Consumer Segmentation and Trading Down

A notable trend is the bifurcation in consumer behavior based on income levels. Wealthier shoppers, defined as those earning over $100,000, are increasingly trading down to discount retailers like Target, Walmart, and Dollar Tree. This was observed in the previous quarter with companies like Dollar Tree and Dollar General. This indicates widespread consumer concern across all income brackets. Near-prime consumers, generally those with household incomes between approximately $100,000 and $200,000, are particularly vulnerable and are experiencing a high volume of delinquencies on their auto loans and credit cards.

BNPL: Short-Term Gains, Long-Term Risks

The current situation presents a short-term positive for BNPL companies as consumers increasingly utilize their services. However, Ganapathy views this as a temporary solution, akin to "kicking the can down the road." The long-term viability of BNPL is questioned, especially given their reliance on private credit for funding. While this funding is currently abundant, the underlying issue of consumer debt accumulation remains unaddressed.

Conclusion

The current consumer spending environment is driven by debt and obligation, with significant reliance on credit cards and BNPL. While BNPL companies may see short-term gains, rising delinquencies in auto loans and credit cards, coupled with anticipated labor market softening and layoffs, point towards a challenging economic period in the first half of 2026. The trading-down behavior of higher-income consumers and the severe credit strain on near-prime consumers highlight the broad-based economic pressures. The market's current indifference to these warning signs could lead to a significant "hangover" as these issues manifest more acutely in the near future.