In the spring of 2020, the pandemic hit borrowers in the back, but as the economy recovered, consumers started taking out loans too.
Consumer applications for auto loans, new mortgages and revolving credit cards have largely returned to pre-pandemic levels by May 2021, according to a new report from the Bureau of Consumer Financial Protection.
Unemployment, which rose sharply a year ago, crushed credit demand. Who wanted to take on a large payment for a car when they weren’t sure if they could pay for an old car? Or if they weren’t driving to work, but opening a store at home?
For example, by the end of March 2020, the number of requests for car loans had dropped by 52%. The largest drops were observed in the states in the northeast and in California, as well as in Michigan and Nevada.
Many vaccinated and borrowing again
Economists say the outlook depends on the virus and vaccination efforts. The employment picture improved after progress was made in vaccinating people and we saw strong incentive support programs deployed in Washington.
But the economic recovery may still face stalls and starts.
The Federal Reserve Policy Committee on Wednesday decided to keep short-term interest rates close to zero amid concerns over the spread on the delta option. The Fed noted: “The industries most affected by the pandemic have shown improvement, but have not fully recovered.”
Make no mistake, not everyone has access to affordable loans.
“Despite the general trend towards recovery, we find that consumers with high subprime and subprime rates have not yet returned to their pre-pandemic levels, probably in part due to tightening credit for these consumers,” the Consumer Financial Protection Bureau noted. …
Other key trends from the CFPB Brief include:
-Mortgage. When it comes to buying a mortgage, we have seen unusually high activity in the mortgage market throughout the pandemic after a brief initial downturn. Requests exceeded their usual seasonally adjusted volume by 10-30%, reflecting low interest rates and a stronger housing market.
-Credit cards. Consumers appear to have been the least inclined to put another piece of plastic in their wallets. It took a full year – from March 2020 to March 2021 – for the number of requests for revolving credit cards to return to their normal levels.
—Automobile loans. Surprisingly, consumers with excellent credit or super prime scores do not buy car loans at the pre-pandemic level. But the report notes that there may be less demand for credit among this consumer group, which may include workers who can work from home, may not want to buy a new car if they don’t commute. (The report did not indicate what the impact of a shortage of cars and trucks, or the impact of semiconductor shrinkage on stocks and sales, could be. But that could be a problem, too.)
Overall, consumer willingness to take out auto loans returned to pre-pandemic levels by January 2021, according to data reviewed by a federal agency created after the 2008 financial crisis.
Low car loan rates help offset high prices
Jonathan Smoke, chief economist at Cox Automotive, said credit conditions were favorable throughout the spring and summer, supporting strong demand for passenger car and truck sales.
A car loan is easier to get than a year ago, he said, going back to where it was before the pandemic began.
“The rates are still lower than a year ago,” Smoke said. “Spreads widened during the pandemic last year, especially for lower credit levels.”
But now, he said, most auto loan borrowers have seen lower rates, especially for subprime borrowers, who have seen lower rates this spring and summer.
“Now that bond yields are retreating from their early spring highs,” Smoke said, “it is likely that consumers will continue to see low and attractive auto loan rates.”
And lower auto loan rates can help offset the impact of rising prices as most people take out a car or truck loan.
Unsurprisingly, consumers are more willing to borrow when they feel more confident about their jobs and their finances.
Total consumer loans rose 10% in May, according to the Federal Reserve’s consumer credit report. This is the largest increase in five years.
What’s good about a car loan, mortgage, credit card?
“The biggest driver of renewed interest in borrowing is an improved and resurgent economy,” said Greg McBride, chief financial analyst. Bankrate.com…
Frightening economic “what ifs” in 2020 are giving way to greater confidence in a stronger economy, he said.
Low rates also increase the number of purchases. The average fixed rate on a 30-year mortgage is 3.04%, up from 3.3% last year. Bankrate.com… An even better rate of 2.5% is available without points. (Mortgage points are additional fees that the borrower pays to the lender to lower the interest rate and lower the monthly payment. (The upfront cost may make sense if you plan to stay in the home or hold on to your mortgage for a long time).
As for the new five-year auto loans, the average rate is now 4.15%, up from 4.24% last year. McBride noted that the best rates are in the 2% range, but sometimes you can see credit union offers at 1.99%.
Average rates for a four-year used car loan are around 4.71%, up from 4.99% a year ago. Again, he said, the best rates could be in the 2% range for borrowers with good credit history.
For credit cards, the average rate is 16.16%. Bankrate.com… This is slightly more than last year by 16.04%. But borrowers with a good credit history can get much better deals. Some promotions offer 0% on purchases and balance transfers for up to 18 months, McBride said.
Credit card debt fell as consumers paid off costly credit card debt and slashed high spending on vacations and other purchases for much of the past year.
Credit card balances fell $ 49 billion in the first quarter, the second-largest quarterly decline in data history since 1999, according to the Federal Reserve Bank of New York. Credit card balances are $ 157 billion less than they were at the end of 2019.
In contrast, balances on mortgages, student loans, and car loans continued to rise. The Fed noted that auto loan balances have grown over the past three quarters and increased by $ 8 billion in the first quarter of 2021 after a brief hiatus in the second quarter of 2020 when many dealerships were closed.
The Fed noted that older consumers, especially those aged 60 and over, may continue to be more wary of the risks associated with the virus itself and may use their credit cards less often, while young people have resumed spending and their outside activities.
Consumers have no doubt found themselves on a stronger financial footing after three rounds of incentive audits – and now many families receive hundreds of dollars in monthly advances from July to December in child tax credit.
Some of that extra cash – and the added credibility of the economy – clearly deserves some credit for recovering borrowing.
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