Federal Reserve data shows that banks in the US have released approximately $7.1 trillion as loans a 4-year period. The beginning of this occurrence was reported be in 2009, just after the recession ended. The move was initiated in order to help the economy that was still weighed down by an over-the-top unemployment rate.
According to the data accumulated, the number one use of loans was in the purchase of autos. Auto lending went up to $134.3 billion in just within the first four months of 2012. Credit bureau Equifax Inc says that the increase in the loan money injected into the economy has prevented it from further slowing down. In fact, the 1.5 percent annual rate can be attributed to this initiative not only by American banks but also by third party lenders.
Third party lenders offering bad credit loans have also doubled in number. And although they grant small loans, the widespread acceptance of applications despite the credit score has really helped a lot. Smalltime lenders provide financial help across state boundaries and economic statuses. As such, part and parcel of the projected 1.5 percent annual rate can be traced back to these small loans.
But the Feds have an additional theory in mind. They say that the near-zero interest rates provided by banks and other financial institutions for the past 43 months have provided additional stimulus for the economy. This way, credit creation begins again. As banks and other institutions provide bad credit loans, consumers start to borrow and every time they borrow, you are helping the economy through the interest rates you pay. In the long run, this cycle would help make everything normal again.
Aside from the better auto industry, there are a few other reasons for the healthier state of lending in today’s market. Some of these would be the renewed confidence of households. Household spending takes up about 70% of the economy so the fact that they now spend instead of save is a really good economic indicator. Other than that, housing prices have gone up too.
The stock market was also positively affected by the influx of lenders. Stocks have climbed and are better than the estimated corporate earnings. It appears that banks are slowly adapting the terms set by third party lenders in a sense that they are now easing their lending standards. Credit scores are no longer used as the sole basis of loan approval. Many are hoping that the established pattern will continue in order to help the economy fully recover from the recession.