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Written by admin on February 24th, 2010

Consumer Loan Defaults Seem to be Slowing

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Consumer loan defaults seem to be slowing down according to the banks. Since the start of the recession there has been a mountain of defaults in both the mortgage and credit card industries. Millions of households are experiencing unemployment or reduced earnings after pay cuts and/or reduced hours. Just last week the U.S. government announced that unemployment had risen to 10.9 percent and could rise further.

There is some irony in the fact loan faults are slowing. One of the contributing factors is the fact that the credit market has been tight. In other words, it’s difficult for even consumers with good credit to obtain loans and new credit cards right now. With less credit being issued, it’s not surprising that loan defaults are slowing down.

Of course, slowing down is not the same as declining, and that’s the bad news. But with unemployment still rising, any sign that struggling Americans are seeing their situation improve is welcomed news. The banks express their optimism very cautiously though. For example, Chief Executive Officer of Bank of America said, “Credit quality appears to be stabilizing, if not improving.”

Unfortunately the loan default numbers are still quite high as consumers try to manage financially. And unemployment could continue to rise which means defaults will stay high until Americans are able to return to work.

Just to give you an idea of the size of the problem, Bank of America wrote off $33.7 billion in loans in 2009. The amount of domestic credit cards that consumers defaulted on totaled $6.5 billion for the bank in 2009. U.S. Bancorp charged off $1.1 billion worth of loans in the fourth quarter of 2009.

So what can consumers expect during 2010? The giant banks are hoping 2010 will see loan defaults peak and begin to decline. Wells Fargo reported a profit in the 4th quarter of 2009. Of course that made shareholders happy but fueled the populist ire over bank bailouts followed by lack of credit and millions of foreclosures. Many Americans are feeling that the middle class family has suffered the worst of the recession’s impact.

Another unknown in 2010 for both the lending industry and consumers is the full impact of the new Credit CARD Act taking effect on February 22, 2010. Banks are concerned they are going to see up to 50% declines in interest and fee revenues. That revenue will have to be recovered somehow, and that is where the biggest unknown in consumer loans is found.

Consumers struggling to endure financially through the recession will have to be prepared for an onslaught of new efforts to convince them to borrow money. Though the U.S. economy relies heavily on consumer borrowing and spending, no one benefits when a default occurs on a loan or credit card. It is impossible to predict what the banks and lenders will invent in the way of new products, but one thing is certain. They will be designed to credit new consumer borrowing opportunities.

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1. Impact of Recession on Consumer Credit
2. Consumers Under Growing Financial Duress
3. Banks Considering Offering Payday Loans
4. $1.3 Trillion Drop in US Household Wealth
5. December Consumer Wages and Credit Figures Show Little Progress