Secured Personal Loans Plummeted in 2012

Arrow plummeting downward
The US economy rose by 2 percent this year with expectations to reach 2.8 percent by the end of 2013, reported BMO Economics. Despite the housing bubble being an all-too-fresh memory in the minds of many people, BMO Economics feels that residential building will help the US perform strongly through the remainder of 2012 and then into 2013.

Additionally, household finances are expected to improve which will strengthen a housing market recovery.

“Home sales and starts have picked up from depressed levels, supported by record-low mortgage rates, pent-up demand and investor interest,” said Sal Guatieri, Senior Economist with BMO Capital Markets. “House prices are rising, lifting household wealth and encouraging first-time buyers to take the plunge. Rising house and equity values should allow households to soon recover the rest of the $16 trillion in wealth that was lost during the Great Recession. We now expect the Fed will delay any rate hikes until mid-2015.”

Despite recent foreclosures, residential construction is leading the economic expansion. Housing starts are also 40 percent below demographic needs. According to BMO Economics this suggests that there is plenty of room for residential construction to continue economic growth.

BMO Economics also found that personal loan growth—which includes both unsecured and secured personal loans—had slowed to its lowest rate in two decades.

Part of this may be the result of valuable assets, such as homes and vehicles, being in shorter supply compared to the supply present in the last two decades. That supply may have dropped due to the number of people that have been foreclosed upon, lost their home equity, or are currently driving out-dated or less valuable vehicles. Less valuable or nonexistent valuable assets would make it difficult to obtain a secured personal loan.

Unlike secured personal loans, which require collateral in order to obtain financing, unsecured personal loans may be seeing a decrease due to higher credit requirements.

After the onset of the recession, many consumers dipped into their credit lines. Some defaulted on their payments and subsequently damaged their credit histories. Combined with banks’ unwillingness to lend, it is no surprise that low personal lending matches the weak economy.

Although optimistic about continued growth—however small—BMO Economics and Mr. Guatieri both caution that there remain potential threats to the stability and growth prospects of the US economy. The ongoing Eurozone Crisis and a potential Eurozone breakup could harm the dollar as well as the US economy. Additionally, spending cuts and tax increases could damage household financing and in turn limit economic growth.