LOMBARD, Ill.—A hangover effect from the recession could spell bad news for financial institutions as the economy continues to improve and rates potentially rise.
That is a concern of Bill Handel, vice president of research for Raddon Financial Group, who explained that Raddon National research suggests that as rates rise consumers may be more hesitant to borrow than in previous periods in which the economy began pulling out of a low-rate environment.
“Some may say that finding may not jibe with what we have been seeing in terms of loan growth, which has been strong recently,” said Handel. “But if you look at loan growth, it has occurred in special areas—like refis and auto lending.”
Refi Opportunities Over
Handel noted the opportunity for refinancings is pretty much at its end, and auto loan experts attribute much of the auto purchases from pent-up demand from buyers who have held onto their cars longer than in the past.
Raddon research conducted annually from 2010 to 2015 shows that consumers have steadily lost their appetite for borrowing. The company asked consumers each of the last five years about their likelihood of taking out a loan in the next 12 months.
“In that five-year period, the percentage of households that thought they would take out a loan in the next year dropped from 35% down to 18%,” said Handel. “So in one of the lowest interest rate environments in the history of the U.S., since 2010 we have seen a steady decline in the anticipated borrowing of the U.S. population.”
Decline In Anticipated Demand
Of the final 18% who said they would take out a loan in the next year, Raddon asked how that decision would be affected if the Federal Reserve raised rates by one percentage point. Half of the consumers surveyed indicated they might change their mind.
“This is concerning. We have seen already seen this decline in anticipated loan demand in a low-rate environment. What happens when rates increase?” said Handel, adding that CUs may not be bracing for this kind of shift in loan demand. “This is something credit unions have to prepare for.”