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Should Investors Be Worried About Consumer Borrowing?

Should Investors Be Worried About Consumer Borrowing? by Shawn Pierce, Columbia Threadneedle Investments

  • Credit to prime and non-prime borrowers is expanding, which is helping support the consumer.
  • Repayment and delinquency data suggest that borrowers are handling most debt burdens relatively well.
  • Student loan debt is a headwind, but the government has shown the willingness and ability to offer payment assistance, which is helping to dampen the effects of the growing burden.

One of the main causes of the credit crisis was an over-levered consumer, both on a housing and personal basis. The crisis forced credit conservatism and deleveraging on lenders and consumers alike. Now that balance sheets have been repaired, credit is becoming more available and consumers are taking on additional debt. Articles such as Bloomberg’s It's Gotten Pretty Darn Easy to Get a Car Loan highlight lower auto loan rejection rates, which have driven light vehicle sales to the highest point since July 2005. There are concerns that credit standards have become too loose and the lessons of the recession have been forgotten. However, current performance indicates that lenders and borrowers have not extended too far.

Post-recession, consumer credit remains a major economic driver. While credit availability was lower for prime borrowers, it essentially stopped for subprime borrowers. Subprime auto loans were only offered to customers who qualified under stringent underwriting, while credit card borrowers were effectively cut off from...