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Personal Loan News Alert: Consumer Credit Declines Again, Steeply

[Sep 22, 2009.]


The Federal Reserve released a report on September 9 showing that consumer credit declined by $21.5 billion in July. That's a year-over-year decline of 10.4 percent.

Consumer credit is comprised of revolving debt (credit cards, mainly) and non-revolving debt (such as personal loans and auto loans). Revolving debt declined 8 percent, non-revolving debt 11.7 percent.

The notion that less people are seeking personal loans may seem strange to borrowers who are relying on personal loans to pay bills in these rough economic times. But it's a fact: less people are seeking personal loans than in recent years. Also, lender approval is harder to come by.

Ultimately, a slow-down in the taking out of personal loans is probably a positive for the economy as a whole, and personal loans in particular. However, this dynamic is not without its dangers.

Last Quarter of 2009 All About Balance Sheet Repair

Despite the somewhat troubled present relationship between lenders and borrowers, both parties are essentially in the same boat at this point: both lenders and borrowers need to repair their balance sheets. And that is exactly what is going to be happening throughout the remainder of 2009.

Banks are looking for ways to move bad loans off their books without giving away bad loans at firesale prices to so-called "vulture capitalists."

Consumers, meanwhile, are saving more and paying down debt at high rates.

Personal Loans Linked to Economic Growth

For a cogent, comprehensive analysis of how consumer credit affects economic growth, read this article about the relationship between personal loans and the overall economy. For our purposes here, it's enough to point out that personal loans fund personal purchases, which fund the U.S. economy.

When consumers have access to and use credit, they buy more stuff from companies that then, theoretically, employ more people. With unemployment in some states above 12 percent, the temptation is to hope that the volume of personal loans starts rising astronomically.

But that is not the best hope for the future of unsecured personal loans.

Better Balance Sheets Should (Eventually) Lead to Better Personal Loan Practices

This balance sheet repair stage is essential for both lenders and borrowers of unsecured personal loans. Less burdened with bad loans, banks can make more loans period. Less burdened with unpaid loans, consumers can take out loans with more confidence.

In the end, the best thing to hope is that both lenders and borrowers use this "quiet period" to reflect on how to make personal loans a better deal for all parties involved.

Sooner rather than later would be nice, but it may take a little while to reach that elusive equilibrium.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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