Interest Rates Are Low, but Loans Are Harder to Get. Here’s Why.
As public school teachers, Tori Smith and her husband have careers that should survive the coronavirus economy, but their mortgage lender wasn’t taking any chances.
It told them that they would have to put down more money to keep the interest rate they wanted, then dialed back what it was willing to lend them. And Ms. Smith said it had checked their employment status several times during the approval process — and again a few days before the couple closed on their home in Zebulon, N.C., last month.
Ms. Smith said she had never gotten a straight answer about the new requirements, but she ventured a guess. “I felt like we had to bring more just because of Covid,” she said.
The economic crisis caused by the pandemic has driven interest rates to rock-bottom levels, meaning there has hardly been a better time to borrow. But with tens of million of people out of work and coronavirus infections surging in many parts of the country, qualifying for a loan — from mortgages to auto loans — has become more trying, even for well-positioned borrowers.
Lenders that have set aside billion of dollars for future defaults have also tightened their standards, often requiring higher credit scores, heftier down payments and more documentation. Some, such as Wells Fargo and Chase, have temporarily eliminated home equity lines of credit, while Wells Fargo also stopped cash-out refinancing.
It’s not unusual for lenders to tighten the credit reins during a downturn, but the current situation has made it especially challenging for them to get an accurate read on consumers’ financial health. Borrowers have been able to pause mortgages, halt student loan payments and delay paying their tax bills, while millions of households have received an extra $600 weekly in unemployment benefits. Those forms of government support could be masking an underlying condition.
“It makes it hard for a lender to understand what the consumer’s true state of credit quality is and their ability to pay back a loan,” said Peter Maynard, senior vice president of global data and analytics at the Equifax credit bureau.Credit card companies, for example, mailed out 57 million offers to consumers in June, a historic low and down from 272 million a year earlier, according to Mintel, a research firm that has been tracking the offers since 1999. Some banks have stopped offering the types of cards that attract people who may be focused on paying down debt, such as BankAmericard, Mintel found.
Credit card companies, for example, mailed out 57 million offers to consumers in June, a historic low and down from 272 million a year earlier, according to Mintel, a research firm that has been tracking the offers since 1999. Some banks have stopped offering the types of cards that attract people who may be focused on paying down debt, such as BankAmericard, Mintel found.
Issuers are also being careful with cards belonging to current customers, said Mark Miller, associate director of insights for payments at Mintel.
“Some dormant accounts are being closed,” he said. “So if they have a credit card sitting in a drawer, those accounts are at risk of being closed, and credit lines with a $10,000 limit may eventually be knocked down to $8,000.”
For auto loans, borrowers with lower credit scores and thin credit histories face more rigorous requirements and less generous terms, including shorter loan periods.
“Subprime borrowers are not getting loans as readily as they were pre-pandemic or a year ago,” said Jonathan Smoke, chief economist at Cox Automotive, referring to consumers with credit scores below 620.
Interest rates for new and used vehicles remain low — below 4 percent at many banks and credit unions — but only for more qualified borrowers, said Greg McBride, chief financial analyst at BankRate.com.
“Good credit and a down payment are required to get the best rates, with weaker credit increasingly sidelined — particularly for older-model used car purchases,” he said.
Ford Motor said it hadn’t tightened standards on loans through its financing unit, but last month it introduced a program to make wary borrowers more comfortable. Those who buy or lease a car through Ford’s financing unit before Sept. 30 can return it within a year if they lose their jobs. Ford said it would reduce the customer’s balance by the vehicle’s book value, and then waive up to an additional $15,000.
If that measure is meant to stoke demand, no such program is necessary for home buyers.
For the first time in nearly half a century of tracking, 30-year fixed-rate mortgages averaged about 2.98 percent, according to Freddie Mac. The mortgage industry made $865 billion in loans during the second quarter, the highest amount since 2003, when quarterly originations twice topped $1 trillion, according to Inside Mortgage Finance, a trade publication.
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