Has the credit crunch, well, un-crunched?
In some ways it has. And yet the reluctance to lend, supposedly one of the factors holding the economy back the past two years, may be followed by a pattern most people will find surprising: a reluctance to borrow.
Is this a good or bad thing? It may be worrisome for the economy but good for individuals, especially in today’s economic climate.
A new Federal Reserve survey of senior loan officers finds a trend toward easier credit, which began in the first quarter, is continuing. About 9% of banks said they were loosening credit standards for large and small businesses, except for commercial real estate. While that doesn’t sound dramatic, it is quite a turnaround given that some 30% were still tightening credit a year ago.
The survey also found standards to be more lax for prime mortgages and consumer credit. Some 5.5% of prime-mortgage lenders, catering to those with good credit, are also loosening their standards, compared to the nearly 22% that were tightening them a year ago. Loosening can entail granting loans despite small credit blemishes, allowing a smaller down payment or approving a smaller income in relation to the loan.
This doesn’t exactly paint a picture of a credit gusher, but it’s a move in the right direction if you believe that borrowing will spur spending and also help the economy.
The same survey shows the demand for many types of loans is not rising. In the second quarter, for instance, about 13% of lenders reported a decline in demand for prime mortgages, following a smaller drop in demand in the first quarter. Demand for those mortgages did increase early in the third quarter, but that may be a distortion caused by the expiring homebuyer tax credit.
A reluctance to borrow is a dramatic change from the middle of the decade, when businesses and consumers eagerly grabbed every cent lenders would let them have. Borrowing is still critical to business expansion as well as the health of the housing market. But it seems clear that businesses and consumers are jittery about the economy, unwilling to take on debt they may have trouble repaying.
A consumer can run through a brief checklist to decide if borrowing makes sense:
Can a long-term benefit be achieved another way? Most people, for instance, cannot buy a home without a mortgage, so borrowing for a home or major home improvement makes sense if you’ll be there awhile. Borrowing for a college education may be a good investment, but borrowing tens of thousands of dollars to buy a car isn’t necessary if your transportation needs can be fulfilled by an inexpensive used vehicle.
What is the “opportunity cost?” This refers to things you might do with money besides making loan payments. It certainly would be better to earn interest with savings than to pay interest on a loan, especially if the interest is at a high rate, as with a credit card.
What if the worst happens? How will you make payments if your income falls short? In the past, for example, many homeowners assumed they could sell if they couldn’t make their mortgage payments. That remedy is doubtful in today’s weak housing market. Credit card users often plan to pay their balances quickly, only to shoulder years of interest payments after money gets tight.
Are you borrowing for routine expenses? Generally, borrowing for groceries, gasoline and other everyday expenses is a warning sign of trouble to come. Instead, comb through your budget to cut expenses so you can live within your means.
Or are you borrowing for convenience? Using a credit card is easier than carrying lots of cash, but a debit card is better, as you’ll pay for things with cash in your checking account, avoiding risk if you’re incurring interest charges.
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