NEW YORK (TheStreet) -- Banks are squeezing consumers more than they were three years ago, despite a recovering economy, according to a new index.The Credit Power Index, based on the world's largest database of banking rates compiled by TheStreet's RateWatch division, reveals how much consumers are squeezed by the rates they pay for credit compared with the interest they receive on deposits at banks across the country. The index shows that the interest rate climate for consumers in the U.S. is considerably worse than it was before the financial crisis, despite the taxpayer-funded banking bailout and the easy money policy of the Federal Reserve. The metric provides new insight into the disposable income of average Americans by measuring their biggest expenses -- mortgages, car loans, home equity loans and credit -- compared with their earnings potential from deposits. The decline in consumers' credit power has largely been driven by a sharp drop in deposit rates, which has not been offset by the smaller drop in loan rates. While mortgage rates have hit historic lows, for instance, the average rate for unsecured personal loans has dipped only slightly during the past few years. "Because the deposit side of the rates has fallen more sharply than the loan side, the spread between what the bank charges you and what it pays you has grown, costing consumers more in net interest rates," says Bob Quinn, chief operating officer of RateWatch. "Based on this 'net interest rate' calculation, this is the among the worst rate climates we have had over the last four years." The index tracks consumers' banking power by subtracting certificate of deposit rates at four terms (12, 36, 48 and 60 months), from the lending rates on four bank products at the same terms: a personal unsecured loan, a home equity loan, a new car loan and an adjustable-rate mortgage. (Banks that did not offer all eight products were excluded from the Credit Power Index; for the full methodology, see How the Credit Power Index Works.) The difference at each term is then added to create the Credit Power Index for each bank -- a measure of how favorable the bank's rates are for the consumer. The greater the index, the greater the difference between loan and deposit rates, and the more consumers are getting squeezed.
The bank bailouts of 2008 and the Federal Reserve's decision to keep interest rates at a record low of 0% to 0.25% for the past two years were sold to Americans as the keys to success -- moves that would ultimately open credit markets and lessen the economic burden on consumers. "This
Broken down regionally, it's easy to see one of the biggest culprits for the current state of affairs: the West. Western states are the worst area to bank in the country, with an astounding 25.15 Credit Power Index. This dubious distinction is driven by poor rates on both sides of the equation. The region comes in dead last in the deposits department, sporting an anemic 0.46% rate on 12-month CDs and bringing up the rear on the other three terms as well. And on the loan side, it has the highest rates on personal unsecured loans and home equity loans. Banks are giving consumers less on their deposits and charging them more to borrow. The West wasn't always a bad place to bank -- as of January 2007 it had a reasonable 18.35 index figure, better than the national average. A rise of nearly seven aggregate interest rate points makes it the region where consumers have lost the most banking power in the past few years. "It's easy to see one of the reasons for the West's position when you look at the state-by-state averages for 12-month CDs in 2010," Quinn says. "The six lowest average rates all belong to states in the Western region."
If you've looked at a bank statement lately, you may have noticed that the cash in your savings account isn't earning nearly what it used to. And if you've tried to open a CD, you were probably shocked by the rock-bottom rate of return you get in exchange for letting the bank use your money. "We have seen a steady decline in rates paid to consumers in the form of CD rates, starting in roughly the middle of 2008," Quinn says. "For instance, a 12-month CD rate has fallen approximately 85% over that period of time." This startling decline in deposit rates has been the single-biggest driver of consumers' declining credit power. As of January 2007, the national average for a 12-month CD was an even 4%; as of December, it's a measly 0.55% among included institutions. That decline has been mirrored by 36-, 48- and 60-month CDs, now returning 1.14%, 1.36% and 1.62%, respectively.
Even Americans who don't own a car or house usually carry some form of debt, typically in the form of credit cards or personal loans. The index therefore uses personal unsecured loans to track the interest rates on unsecured personal debt since January 2007.
Credit cards and unsecured loans are great options for those who need cash but are unable or unwilling to put up property as collateral. But Americans can get a significantly lower interest rate on their personal loan by putting up collateral such as the equity in their home. Home equity installment loans in a 36-month term are used for the next segment of the Credit Power Index. Home equity loan rates have dropped, but the pattern during the past few years suggests that it's not a simple matter of Americans tightening their belts to weather the recession. In January 2007, the average interest rate stood at 7.74% and stayed fairly steady for the better part of three years; as of July 2009 the average rate at surveyed banks was 7.83%. At that point rates started to drop, and as of December 2010, the average rate for a 36-month home equity loan stood at 6.57% -- a drop of approximately one percentage point in less than 18 months.
Rare is the person who has the liquidity to buy a new car outright, which means most need an auto loan. The ubiquitous new auto loan is used for the 48-month segment of the Credit Power Index. Fortunately for consumers in need of a car, those rates have plummeted along with deposit rates; they sit at 5.15%, way down from the average of 7.43% in January 2007. But those rates are still higher than they could be. The market for new-car loans is dominated by so-called captive finance companies -- the lenders affiliated with auto manufacturers, which are not surveyed by RateWatch. These institutions are better positioned to offer lower rates due to their size and ability to write off discounts as a marketing expense. Baumohl estimates that getting your loan through the manufacturer can save you between 100 and 200 basis points on your loan. With most new-car buyers getting financing through the manufacturer, that means many of those who go to banks for loans are there because they have poor or insufficient credit. That's necessarily going to drive up the rate market at banks. Still, if you're going to buy, now's the time. People who have put off their purchase during the recession may finally be ready to buy, and that will increase demand for car loan products -- and by extension, the prevailing interest rate. "People have been holding on to their old cars, and now those aging cars are getting to the point that
The recent history of adjustable-rate mortgages has been a sordid one, with some foreclosed homeowners alleging that the terms of their home loans constituted predatory lending. But many consumers still find the product to be a good option for low-cost financing. In the Credit Power Index, five-year ARMs represent the real estate segment of consumer debt. Admittedly, ARMs haven't been the most popular home loan product lately. "In general I don't think that's a product that
So where are we going? In a word, up. Economists don't agree on when it will happen, and the Federal Reserve decided once again on Wednesday to leave interest rates unchanged. But the general consensus is that once the economy begins to recover, emboldened -- and hopefully, employed -- consumers will increase their demand for loans. That will drive up loan rates, but also force banks to raise deposit rates to raise the capital needed for this increased lending. Some analysts say the turnaround has already begun in the form of increased loan demand. "You're going to start seeing a turn on the demand side," Lloyd says. "If you listen to some of the CEOs of these banks, they're saying there's a slight uptick."
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