2 Consumer Loan Stocks to Buy on Promising Industry Prospects

Falling interest rates and easing lending standards are brightening the outlook for the Zacks Consumer Loans industry. The Federal Reserve’s recent rate cut and signals of further easing are expected to sustain and even boost loan demand, supporting modest growth in the top line.

While improved consumer credit scores and looser lending criteria are expanding the borrower base, declining consumer confidence is a concern. Despite several credit quality metrics creeping above the pre-pandemic levels, lower rates will likely aid repayment capacity. Hence, industry players like Capital One Financial Corporation COF and Encore Capital Group, Inc. ECPG are worth betting on.

About the Industry

The Zacks Consumer Loans industry comprises companies that provide mortgages, refinancing, home equity lines of credit, credit card loans, automobile loans, education/student loans and personal loans, among others. These help the industry players generate net interest income (NII), which forms the most important part of total revenues. The prospects of the companies in this industry are highly sensitive to the nation’s overall economic condition and consumer sentiments. In addition to offering the above-mentioned products and services, many consumer loan providers are involved in businesses like commercial lending, insurance, loan servicing and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms diversify revenue sources and be less dependent on the vagaries of the economy.

3 Major Themes Influencing the Consumer Loan Industry

Interest Rates & Loan Demand: The Federal Reserve lowered interest rates by 25 basis points (bps) in September and signaled two more cuts by the end of the year. This followed a 100-bps cut announced last year. Meanwhile, last month, consumer confidence declined to its lowest level since April 2025 as pessimism over inflation and the softening labor market continued to grow. Against such developments, demand for consumer loans is likely to remain steady and even improve as rates fall. So, industry players are expected to witness modest growth in net interest margin (NIM) and NII going forward.

Lending Standards: With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, several consumers' credit scores have improved. This has raised the number of consumers for the industry participants. Further, easing credit lending standards is helping consumer loan providers meet loan demand.

Asset Quality: Falling interest rates will help borrowers to remain current on loan and interest repayments. Consumer loan providers, who build huge reserves to counter any fallout from unexpected defaults and payment delays, are now less likely to set aside a huge amount of money for potential delinquent loans. The industry players are, however, still expected to witness a marginal increase in non-performing loans, which will keep hurting their asset quality. In fact, several credit quality metrics are trending above pre-pandemic levels.

Zacks Industry Rank Reflects a Bright Picture

The Zacks Consumer Loans industry is a 16-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #87, which places it in the top 36% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised 16% upward.

Before we present a couple of stocks that you may want to add to your portfolio, let's take a look at the industry’s recent stock market performance and valuation picture.

Industry vs. Broader Market

The Zacks Consumer Loans industry has outperformed the Zacks S&P 500 composite and its sector over the past two years.

The stocks in this industry have collectively skyrocketed 127.6% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have surged 56.9% and 51.2%, respectively.

Two-Year Price Performance

 

Industry Valuation

One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), commonly used for valuing consumer loan stocks because of significant variations in their financial performance from one quarter to the next.

The industry currently has a trailing 12-month P/TBV of 1.13X, above the median level of 1.02X over the past five years. This compares with the highest level of 1.41X and the lowest level of 0.74X over this period. The industry is trading at a considerable discount compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 is 13.68X and the median level is 13.79X.

Price-to-Tangible Book Ratio

As finance stocks typically have a lower P/TBV, comparing consumer loan providers with the S&P 500 may not make sense to many investors. However, comparing the group’s P/TBV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 5.68X for the same period is way above the Zacks Consumer Loan industry’s ratio, as the chart below shows.

Price-to-Tangible Book Ratio (TTM)

 

2 Consumer Loan Stocks to Invest in

Capital One: Headquartered in McLean, VA, the company is primarily focused on consumer and commercial lending and deposit origination. It acquired Discover Financial in May, which reshaped the landscape of the credit card industry and led to the formation of a behemoth in the industry. Now, the company is well-positioned to capture a bigger share of spending on cards. 

Further, strength in credit card and online banking operations, decent loan growth, robust balance sheet position and strategic expansion initiatives will support Capital One’s financials.

With the Federal Reserve likely to lower interest rates in the near term, this Zacks Rank #2 (Buy) company’s NII and NIM are expected to witness modest improvements despite elevated funding costs weighing on both. Strong growth opportunities are expected in card loans and purchase volumes, despite an intensely competitive environment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for earnings for 2025 suggests growth of 22.1%. Also, COF’s shares have soared 18.8% this year. It has a market cap of $135.5 billion.

Price and Consensus: COF

Encore Capital: Based in San Diego, CA, ECPG provides debt recovery and related financial services worldwide. Through its global subsidiaries, the company acquires portfolios of charged-off consumer receivables from leading banks, credit unions and utility providers, leveraging data-driven strategies to optimize collections and portfolio performance.

Encore Capital plans to leverage its leadership position in portfolio purchasing and recovery as well as credit management services, to bolster its market share worldwide. Over the years, the company’s portfolio purchases and collections have increased, which supported its top-line expansion. 

With rising delinquency/charge-off rates in the United States, there is more supply of non-performing loans. This offers Encore Capital an additional opportunity to purchase portfolios and apply its analytics and collections capabilities for higher returns. Also, as interest rates decline and the ability of borrowers to repay loans improves, the company’s collections will likely be steadier.  

This Zacks Rank #2 stock has lost 10.7% this year. ECPG’s earnings are expected to jump 63.3% this year. The company has a market cap of $981.9 million.

Price and Consensus: ECPG

 

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Capital One Financial Corporation (COF): Free Stock Analysis Report
 
Encore Capital Group Inc (ECPG): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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