Report: Loans Are On the Upswing

Published on 2012-02-27

Loans haven't exactly been a popular financial product for the last few years: loan activity dropped sharply in 2008, as the real estate bubble popped, unemployment began to rise, and credit froze up.  That last reason is important; the harder it is to get credit, the harder it is for businesses to expand and for customers to pay for big ticket items.  So any sign of credit thawing is a good sign...and we saw two good signs in November and December 2011

In November, household borrowing in the form of installment debt, that is, loans other than mortgages, went up 9.9%, and in December, it rose another 9.3%.  The two biggest sources of borrowing?  Student loans and auto loans, closely followed by credit cards.  It also happens to be the biggest two-month surge in borrowing in more than a decade, after automakers rolled out 0% financing on their cars in order to move vehicles in the wake of 9/11.

So, what's going on, and why has consumer borrowing suddenly turned around after being so cold for so long?  There are a few theories being knocked about.

The first and foremost is the fact that interest rates are at record lows.  For example, auto loans were at a measly 5.22% for a new car, and used car rates were barely a percentage point higher.  Meanwhile, student loans weren't so bad themselves, running at 7.9% on average.  Considering the loan rates on credit cards, that has to be appealing to customers.

But secondly, the feeling is that consumers are confident enough in making their payments that they want to take out loans to better improve themselves.  Getting an education can open up a lot of doors; the Bureau of Labor Statistics notes that even in the worst of the Great Recession, the college-educated were more likely to be employed, make up a larger percentage of the labor market, and make more than their counterparts. The more education you had, the lower those unemployment rates went: graduate school-educated individuals had a measly 2-3% unemployment rate, even at the absolute worst this economy could dish out.

Similarly, getting a new car, and thus some reliable transportation, means that the car owner can go further afield to find a better job.  Or perhaps they've already found a better job, and just need a way to get there.  Either way, it's hardly surprising that Americans are feeling like they can spend money again, after January's job report showed that employers had added 230,000 jobs, a lot more than expected. 

So how will loan availability look in the future?  Honestly, that depends largely on the economy.  If employers keep adding jobs and keep hiring, then credit will thaw faster and faster as more money enters the economy and banks feel safer.  Student and auto loans will also probably keep going up; the recent economic problems have taught a lot of people that they're better off getting a college degree than taking their education for granted.

But the most important thing is that the economy itself is turning around...and that's news we all want to hear.


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