The pandemic had been catastrophic to small business owners and unstable workers. Business closures and lay-offs happened left and right, leaving countless people struggling to meet their needs. Though some were fortunate to have benefited from a stimulus package, many still found it insufficient for their families, especially if they’re in debt. As such, did they turn to loans to restore their cash flow?
It may seem counterproductive to increase your debt when you’re already short on cash. Lenders may not even approve your application anyway, because they require borrowers to have a steady stream of income. But with the job market also affected by the pandemic, many people didn’t have much choice. That said, how did lenders adapt to the change in the market, and how did the market get by?
Personal Loans During COVID-19
Ipsos for Forbes Advisor conducted a survey last March, asking Americans whether or not they took out a personal loan during the pandemic. 25% of the respondents stated that they took out a personal loan and used it for home improvement projects, which was the most common purpose of personal loans since March 2020 up to the present.
The survey also found that people living with children were more likely to get a personal loan for home improvement than those without kids in the house. Sure enough, home remodeling projects soared during the pandemic.
Part-time workers, meanwhile, were more likely to use a personal loan for their medical expenses, auto repairs, vehicle financing, moving, or education than full-time workers or unemployed or retired individuals.
Following home improvement projects, the most common reasons for taking out a personal loan were medical bills, debt consolidation, financing a vehicle, and auto repairs.
Mortgages During COVID-19
Mortgage payment delays were rampant during the pandemic. To avoid foreclosure, homeowners sought forbearance from their lenders. Under the CARES Act, mortgage forbearance allows borrowers to skip or make smaller payments to their home loans, providing them more cash for urgent needs.
Despite entering forbearance, though, many people still felt stressed about getting and staying on track with their mortgage payments, as per a survey by Credit Karma. Over 4 million mortgages were in forbearance in May 2020, and in April 2021, it jumped to 2.2 million more.
59% of homeowners in forbearance felt that they’d be more financially stable if they delayed their monthly payments. 62% said likewise and added that they felt stressed about the payments they had to make in the future.
34% of those in forbearance used the cash that would’ve gone to their mortgage for groceries, medical needs, utilities, and other pandemic-related essentials. Nearly 32% put the money in either emergency savings or a general savings account. 21% redirected the cash to other debts like student loans and credit cards. And lastly, the remaining 13% claimed that they didn’t have extra money at all, even in forbearance.
Those that applied for a mortgage, on the other hand, may have had a hard time getting approved. Though interest rates have declined substantially, lenders tightened the requirements on some of their offerings, such as jumbo fixed-rate mortgages, cash-out refinances, and home equity lines of credit. The increased restrictions were due to the heightened risk in the market.
Shortage in Consumer Loans
Loans became the lifeline of the millions of people who lost their jobs to the pandemic. For that reason, consumer loans had shortened in supply.
Despite the decreased interest rates, lenders tightened their standards and thus shrunk the availability of credit. So if people managed to get a loan during the pandemic, the price they paid was relatively low. Meanwhile, the people who needed the loan had trouble gaining access to them.
Indeed, credit card rates dropped to a three-and-a-half-year low of 16.22%. Yet banks restricted access to them. As the conditions worsened, credit card holders began closing their accounts and reducing their credit limits, especially if their accounts were at risk for delinquency.
Within 30 days, a whopping 50 million credit cardholders had their credit limits cut down or their accounts closed altogether. This record-high number proved the tremendous impact of COVID-19 on the economy. Because of the spike in unemployment, safe borrowers turned into risky borrowers overnight.
The most attractive loans during the pandemic were personal loans since they were unsecured and didn’t require borrowing against something of value. What’s more, the average interest rate for personal loans was only 11.25%, which was considerably lower than the annual percentage rate of credit cards. However, any uncollateralized loan was still hard to get, especially if borrowers had a credit score below 680.
All in all, the loan market had a greater risk during the pandemic, even some people with enough means to sustain their everyday living. People with low credit scores particularly struggled, but those who remained credit-worthy were more fortunate. COVID-19 proved that anyone’s financial standing could literally change overnight.