Credit is becoming increasingly easier to acquire and banks have loosened their credit terms across the country. Credit cards, car loans, and other loans have lower rates.
The Federal Reserve (FED) lowered its standards for approving credit applications, while only 2 % of U.S. banks imposed stricter standards. Part of the increase in lending is due to stimulus checks and unemployment benefits.
At the beginning of the pandemic, banks expected a massive default on loan payments in the U.S. However, with the emergency checks provided by the federal government, Americans have not only responded to their loan payments on time but have been able to generate the highest savings rates in decades.
Now banks face a new challenge: low demand for credit. While many Americans are finishing paying off their credit card debt in full, lenders are having trouble maximizing their interest earnings.
With the strategy of lowering the conditions for a loan, people who last year would have been denied a loan or a credit card, now receive them easily or are even offered by the banks themselves.
“The fact that consumers today are stronger than they were on average before COVID, coupled with the expectation that the economy is going to improve, are very favorable factors for lenders to start lowering their terms,” says Moody’s analyst Warren Kornfeld.
How is new lending by commercial banks working out?
Banks are looking for new ways to expand credit with tools other than customers’ credit histories. A group led by JP Morgan Chase is working on a pilot project to offer credit cards based on the management of their bank accounts rather than their record of paying debts. The program could offer thousands of Americans access to cheap credit without resorting to so-called payday loans.
Currently, more than 50 million Americans have no credit history at all, according to information from the Consumer Financial Protection Bureau, a characteristic that primarily affects the country’s Hispanic and black populations.
As of now, more than 4 million African Americans and nearly 5 million Hispanics have no credit history, and nearly 30% of potential bank customers among Hispanics and Blacks do not have sufficient characteristics to qualify for a credit disbursement.
Under programs that focus on the management of savings accounts, or with more lax criteria on the part of banks when disbursing credit, thousands of Latino and black consumers could benefit from this new expansion of the banking sector.
Banks have also lowered standards for approving home loans. However, due to current high real estate prices, many people have been deterred from resorting to low home loans.
Low lending is likely to persist for some time as the economy opens up, consumption recovers and the FED maintains near-zero interest rates, allowing commercial banks to continue to have low lending requirements.