The gigantic overhang of bad property development loans may be occupying most of the financial sector's attention these days. But highly indebted Irish borrowers are in danger of delinquency as unemployment rises rapidly and disposable income crumbles under the pressure of higher taxes and pay cuts.

Arrears and impairments on small-time debt such as car finance, term loans, overdrafts and credit cards are getting worse, according to the banks, and could pose a challenge for the capital-starved institutions once their reserves have been depleted from absorbing losses from property and construction write-downs.

While total consumer lending is nowhere near as large in absolute terms as property finance, the total market is estimated at about €35bn. That number comes to about 40% of the value of assets the government expects to transfer into the new National Asset Management Agency (NAMA) for property development and investment loans.

It is also slightly larger than the projected tax take for all of 2009. So it is real money, even if widespread consumer loan losses on their own are unlikely to destroy any bank that has survived the property debacle.

"It's one of the many issues banks are facing right now," said NCB banking analyst John Cantwell. "The scale of the write-downs won't be as high as property and construction, which are going to overshadow consumer finance for a while, but it is one factor affecting capital at the moment."

At the big two banks, AIB and Bank of Ireland, total impairments on non-mortgage personal loans are second only to property and construction, outstripping all categories of business lending as well as mortgages. But the scale of possible write-downs on property loans is so overwhelming that the comparatively small problem of souring personal lending isn't even on the official agenda, at least not yet.

Talking to The Sunday Tribune a fortnight ago, Peter Bacon, the chief architect of NAMA, laughed when asked whether consumer loans could become part of NAMA. "It's been enough of a challenge dealing with property and development-related issues," he joked.

But the banks themselves are starting to flag the problem. AIB warned in its 2008 annual report last week that the downturn in the Irish economy was affecting the ability of personal borrowers to meet payment obligations. Irish Life & Permanent (IL&P) carried similar guidance in its annual report, stating that "the rapid deterioration of the Irish economy – in particular the sharp rise in unemployment and the continued reduction in property values [had] translated into increased levels of arrears" and that "the group expects impairments to increase further through the cycle if economic conditions continue to deteriorate".

At AIB, impairments on personal loans nearly doubled last year to €257m, or 3.5% of the €7.4bn book. While that figure was dwarfed by more than €1bn in property development impairments, it still represented 13% of total impairments – a disproportionately large amount considering personal lending makes up just 8% of total lending at AIB.

The story was much the same at Bank of Ireland, where personal lending accounts for 5% of loans. Interim figures to the end of September 2008 put personal impairments at €288m – a 4% impairment and 14.5% of all impairments. IL&P's raw number was much smaller at just €61m out of a personal loan book of €2.3bn, but because the group has no development loans and a relatively low overall impairment level, the proportion of personal impairments hit 30%.

Meanwhile credit unions – significant players with roughly one-fifth of the personal lending market – recorded 6.5% of loans last year were at least 10 weeks behind in payments, up from 5.9% in 2007.

Data from the Money Advice and Budgeting Service (Mabs) confirm that consumer debt is a growing problem for financial institutions.

According to statistics for the first quarter of this year, more than half of people seeking assistance were having trouble paying their personal loans, credit cards or overdrafts – far more than could not make their mortgage payments. Moreover, the numbers seeking help in this area jumped by more than 25% in the last year.

"People are in difficulty right across the product range usually because of a change in life circumstances, such as decreased income," said Mabs spokesman Micheal Culloty. "Banks must be proactive on mortgage arrears, but borrowers don't have the same protection on other loans."

A possible early indicator of where these trends in Irish consumer finance might be heading comes from the US, which has experienced each phase of the banking crisis months ahead of most other countries. Even though many of the big American banks – Goldman, Wells Fargo, JP Morgan – have been reporting better than expected earnings for the first quarter of the year, a close look reveals just how troubled the consumer finance segment is becoming.

At JP Morgan, for example, rising unemployment has boosted default and delinquency rates on credit-card and other consumer loans. Credit cards, a unit the bank does not expect to be profitable at all this year, lost $547m in the quarter. The default rate climbed to 7.7% from 5.6% in the fourth quarter and 4.4% in the previous year. "It is almost certain we will see no improvement in those numbers for the next three quarters, probably through the middle of next year," Gavin Graham, director of investments at Bank of Montreal Asset Management in Toronto, told Bloomberg.

A study published early this month by the American Bankers Association (ABA) found that 3.2% of consumer loans were in arrears at the end of 2008, the highest level since records began in 1974. The trend in missed payments closely follows unemployment and the ABA does not expect the trend to improve before 2010.

Analysts have been sending out warnings about UK banks, too, where consumer loans are seen as the next trouble spot after property and construction loan losses filter through the balance sheets. NCB's London office expects the next phase of write-downs at global banking giant HSBC to reach $10bn this year, with the next phase to come from its credit card portfolio, according to a research note last week.

But even if the legacy of heedless consumer lending could become a problem for the banks in the next year, it appears consumers themselves have absorbed the grim reality of the recession in Ireland and are borrowing less – even as more people are falling behind on their personal loan payments. With consumers pulling in their horns, the problem may become slightly more manageable.

Central Bank credit statistics from February show only €766m in new spending on credit cards – the lowest in three years of available figures. The year-on-year increase in credit card debt was only 3.3% higher at €2.9bn that month, as well, far below the 10% norm that prevailed even through much of last year.

There is some hope, then, that personal loan losses will at least be self-limiting.