How COVID-19 and Inflation Influenced Consumer Lending Habits in the US

The pandemic turned the global economy upside down. Many Americans lost their jobs or received pay cuts because imposed lockdowns caused many businesses to close. In June 2020, 40 million people could not work for four weeks because their employer’s business closed down. Due to the widespread income loss, consumer lending habits around the country drastically changed. 

Things are getting better now, but in June 2022, 2 million people still experienced being unable to work for a month due to businesses closing down. As of the same month, 5.9 million are still unemployed in the United States. However, things are expected to turn around regarding employment because, according to recent findings, there are almost two job vacancies for every unemployed American.

The demand for personal loans decreased by at least 30%

The job losses in the US have hit an all-time high since the Great Depression. However, the demand for personal loans decreased by 30% to 40%. We’ve seen such a drastic decrease due to several factors.

Factors Influencing the Decrease in Loan Demand

You’d think the pandemic caused people to request more loans, but it didn’t. Research shows that a variety of factors drive the decreased need for personal loans during COVID-19.

Decreasing consumer confidence

People were losing jobs left and right when the COVID-19 pandemic started. Job security and economic certainty became a thing of the past. These factors prompted consumers to tighten their purse strings and find ways to lessen spending.

Businesses closing down

As a result of the health safety restrictions imposed globally, businesses were forced to close down. With that, some of the products and services that loans were used for basically disappeared overnight. For example, getting a car loan wasn’t possible because no one was allowed to go out, except for essential workers and those with essential errands to do.

Stimulus checks

Another factor that led to the decrease in loans at the onset of the pandemic was the stimulus checks released by the government to help families directly affected by the pandemic-induced economic fallout. Using their stimulus checks, some people could pay off their credit card debts and make payments toward their mortgage.

The total credit card debt in the US decreased

At the start of the pandemic, the consumer trend was spending less. This drastic change in consumer spending habits in the US is partly by choice and partly due to the decreased opportunity to shop given social distancing policies. From February to early May 2020, bank deposits in the US have risen by 15%, resulting in a whopping $2 trillion increase. Clearly, Americans have been focusing more on saving money instead of spending it. In line with this, the total credit card debt in the US at the onset of COVID-19 declined by $80 billion. Stimulus checks and mortgage forbearance contributed to this decline.

30% of Americans had increased credit card debt in 2022

Two years after the pandemic, inflation is on the rise. While 30% of Americans reported having more credit card debt, the other 30% reported better credit scores. Nearly half of those whose credit card debt has increased (48%) pointed to inflation as the cause. On the other hand, 34% state that income loss is to blame. 

However, we should also consider that 28% of Americans had never had credit card debt during the pandemic, 24% had the same amount of debt, and 17% were able to lower their debt. 

Parents with underaged children are the most likely demographic (40%) to be in debt during the pandemic. This is the result of nearly 40% of parents losing their jobs or income. They struggled to provide for their families and were more vulnerable to going into debt. Additionally, Millennials (39%) and low-income workers (37%) were also racking up debt. 

To make for the sluggishness and awfulness of the past two years, people have turned to retail therapy and are more likely to overspend, which also contributed to the growth in credit card debt.

The Future of Lending — Final Words

As 2022 is coming to a close, the finance industry has seen unprecedented changes. Businesses have had to deal with the effects of COVID-19. As the government offers less support, companies and employees feel the pandemic’s economic impact. 

Simultaneously, digital solutions, such as AI and machine learning, will continue to accelerate the growth of lending in America and allow companies to adapt.