Lenders Face Headwinds as Borrowing Falters and Job Fears Rise

Total consumer borrowing slowed in August to just 0.1%, according to the Fed’s G.19 report. The August gain of $363 million is tiny against that of $18.1 billion last month. Following a jump in July, credit card balances fell 5.5%, and car and school loans increased by about 2%.

High card rates (22.8% APR) are part of the story. Generally, high credit card rates spur consumers to pay down their balances and avoid racking up new debt. Lenders, who count on the high-interest revolving business, are under pressure.

Households up to their eyeballs in debt have little room for more borrowing. Weak employment adds to the trouble. High-risk borrowers are less likely to qualify for additional debt if lenders grow hesitant. 

In these circumstances, lenders will want to stress-test their portfolios, checking to see the effects of high inflation or unemployment. But small borrowers could get shut out even if there’s only a minor downshift.

U.S. borrowing slowed dramatically in August, with credit card balances falling 5.5% as well.

Auto and personal loans are OK for now, but you can bet lenders are eyeing early delinquencies closely. Slippage will likely occur when borrowers start missing small payments.

Rising Inflation and Job-Loss Concerns

The Survey of Consumer Expectations (SCE) from the New York Fed is unlikely to make anyone feel better. Annual inflation is expected to rise 0.2% to 3.4%, but more troubling is the 2.4% slide in expected pay growth, which hasn’t been that low since 2021.

About 41% of people think unemployment will worsen next year, with the chance of job loss increasing to 14.9%.

Families with low to middle incomes feel the brunt. Subprime lenders can quickly see when these households cut spending. As a matter of fact, the SCE frequently reveals stress before lenders see damage to their loan books. Down the line, we may expect worries about prices to lead to missed payments, usually within months.

The SCE data shows lenders which borrowers are at the highest risk, categorized by income, job type, location, etc. It is precisely these at-risk borrowers who benefit most when lenders offer payment help or extra support.

The survey says that consumers expect to spend less on necessities, not to mention luxuries. In other words, things can go downhill quickly if the population is hit by price increases or job losses.

Implications for Subprime Lenders

Both reports raise the caution flag. It looks like rough sledding ahead for lenders, what with lower credit card balances, higher prices, and growing job fears. 

The big question is whether non-bank lenders will chase after riskier customers. That may help preserve revenues for now, but defaults may increase in the future.

Nonetheless, stress creates opportunities. With banks getting cold feet, some near-prime consumers may have to deal with subprime channels. The payoff is that these lenders may be able to offer more quality loans.

And since the SCE shows people cutting back even on basics, lenders could design smaller, simple loans to help customers pay for things like rent or utilities.