3 Key Financial Issues Facing Consumers Through Year-End Because of Covid-19

By: Ron Oertell
Published: July 22nd, 2020

The pandemic unleashed a staggering one-two punch on the economy – double-digit unemployment and drastically reduced revenues for many businesses. As states reopen with varying restrictions, what the future holds in the next 6 to 12 months is anybody’s guess. But while the economic downturn will continue to affect consumers and businesses indefinitely, it could have been even worse.

Given the high unemployment rate, there was very strong concern as to what short-term effect the pandemic would have on consumers. The surprise has been that consumers have been relatively stable in paying their bills. That has been driven in part by public policy decisions such as the stimulus payment plans and the government stepping up in a strong way.

In past crises, the government has walked solutions into the crisis. This time they have run to fix the problem from many different aspects. From a consumer finance side, deferments and defaults are lower than some of the initial estimates. However, there is a strong concern that we’re not out of the woods yet. We still have a very high unemployment rate. And nobody knows how long it’s going to take for the true economy to recover and for the marketplace to drive strong consumer performance.

Here is my outlook on three key issues facing consumers as the nation tries to get back to work during the pandemic.

• Tightening lending. With unemployment remaining high, many people seeking loans or credit may find both harder to secure. I believe it will be a challenge for many people to obtain credit. There will be an undersupply of credit and bank-backed funding for individuals who are unemployed. When the economy was strong, credit was relatively easy to obtain, but now lenders are cutting credit limits on some current customers and making new credit more difficult to get. The country went from its lowest unemployment rate in many decades to its highest in 90 years, and banks are showing they are nervous.
• Government support. If more consumers are denied credit or loans, where will they turn? Much will depend on the actions of federal and state governments. If governments and lenders continue to provide unprecedented support to individuals through payments and/or expense relief measures, such as mortgage payment moratoriums or the halting of eviction proceedings, then I do not see personal bankruptcies rising significantly. The speed of the recovery will be critical in determining the effect of the high unemployment rate on the number of bankruptcies. A theme many have recently expressed is the confidence in the government to continue forms of consumer support through the election period. However, such governmental actions cannot continue indefinitely. When consumers are denied traditional lower-cost credit, many will turn to higher APR lenders or nontraditional forms such as title loans to cover unexpected or emergency life events.
• Consumer debt. Recent reports have indicated consumer debt is down as a result of the pandemic and people drastically reducing their shopping. What impact could that have on people getting credit? A reduction in shopping could reduce an individual’s request for credit, as well as reduce outstanding balances on credit cards. Traditionally, both factors would increase availability based on standard underwriting metrics. However, many lenders have placed hard cut-off rules based on employment status and other factors, which would more than offset any benefit from the reduction in shopping. Over the next few months, lenders will continue to deal with the uncertainty of future creditworthiness when traditional indicators of payment behavior are distorted and capacity to pay is highly uncertain.

Conclusion

Consumers are facing very challenging economic times, but the long-term impact of the pandemic on the credit markets isn’t close to clear. How many businesses are fully functioning, and whether the unemployment rate is substantially lowered, will be the key things to watch in the next few months.

Ron Oertell is Chief Financial Officer at LendingUSA, a consumer lending company focused on physical point-of-sale locations. He has more than 25 years of experience as an attorney, investment banker, investment fund manager, and CFO, and has completed more than $9 billion in capital transactions.

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