Unsecured Loans and the 2009 Economy

Looking at the record-high unemployment rate, high credit company fees and lowered home values, exactly how were consumers paying down their unsecured loans last year? New studies are showing that they weren’t. Though the repercussion of defaulting is a lowered credit score and credit strain in the future, many consumers were just too stretched to manage credit wisely. The numbers being compiled by the Federal Reserve show that there was a huge drop in credit card debt throughout 2009. A knee-jerk assessment may be to look at that as good news, but further inspection shows that it isn’t. The truth about the lowered amount of debt is that the bulk comes from banks that were forced to write off loans consumers failed to pay. Typically, once a balance is 180-or more days due, it is considered a write-off.

Defaulting loans in 2009 – the huge write-off amount

In 2009, banks wrote off over $83 billion in credit card debt. That is a record-high number, and it shows how much strain consumers were under as a result of the recession. Since that makes up for the bulk of the decline in credit lending totals, is proves that lenders are going to move cautiously into the future. The Federal Reserve’s reports on outstanding loans reveal larger problems for future credit lenders. They are going to face a consistent lowered priority if the economy falters again. People become focused on survival and paying off mortgages, cars and monthly expense, rather than paying down debt. More and more consumers are willing to ignore debt and risk their credit scores in turn, in lieu of their property.

The Federal Reserve’s report also showed that credit card borrowing fell for 16 straight months prior to January of this year. That suggests that consumers have been paying down debt and spending less. People are no longer reliant on credit because they saw what credit lenders did when the economy got bad. They hiked up interest rates, lowered limits and added fees to mitigate their own losses. That was great for them, but exacerbated the problem of defaulting on unsecured loans.

More conclusive data

The report by the Federal Reserve also focused on last year’s overall performance when it comes to credit lending. Though borrowing fell, it wasn’t replaced by additional borrowing. Rather, people were just paying down their own debt, but also focusing on keeping their balances low. When experts consider how much banks are writing-off in bad debt, the question of consumer ability to repay debt comes into play again. In 2009, there was only one quarter where consumers were consistently paying down their debt. Early in Q1, debt was a priority, and consumers had the ability to chip away at it. In fact, over $46.9 billion came in from consumers trying to bring their balances down. After that though, credit balances either remained steady or went up.

The Future Financial Outlook

The charge-off rate was highest during the third quarter of 2009, and it hit a record 10.1% during that time. By comparison, around the same time in 2006, that rate was just 4%. Experts are predicting that the credit situation may get worse for banks in 2010. Moody’s Investor Service predicts that the charge-off rate may top out at 12% by the end of this year. The biggest part of the issue is that the unemployment rate is still high, and that may make paying down unsecured loans next to impossible for consumers for the remainder of the year.

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