The pandemic reshaped a lot of moving parts of daily life, everything from how we shop to how we eat and even how we access bank accounts and get approved for loans. Stores and restaurants have reopened, but many experts believe the changes to lending are likely here to stay, at least in some capacity.
Let’s take a closer look at some of the changes that have reshaped lending for the long term.
Lending Goes Digital
As with many daily activities during the pandemic, lending dipped its toes in the digital approach. Banking in general has been trending in this direction for many years, but lending has still largely been reliant on in-person interactions.
There were several factors that influenced this shift. For starters, the pandemic sent mortgage rates plummeting to extremely low rates, creating a high demand for mortgage refinancing. In turn, this created massive bottlenecks for lenders as they tried to navigate a higher volume of business. And like many other industries and businesses, banks also experienced worker shortages, leading to an even higher workload on the remaining employees.
To help manage the demand, lenders embraced digital tools and channels to stay connected to clients, maintain social distancing, and keep loan applications moving forward.
J.D. Power Managing Director of Consumer Lending Jim Houston stated in a recent report: “The consumer lending landscape shifted dramatically over the past year and consumers need to understand that this shift will be permanent. To attract and retain customers, personal lenders need to deliver easy-to-use technology and adapt communication channels to market demands.”
Moving forward, expect to conduct more loan applications online. Banks and lenders will likely be bringing in advanced technology in the coming years to assist in making faster decisions. This is good news for consumers, as a shift to online convenience can mean more opportunities to apply for loans instead of visiting with each potential lender in person.
Loan Processing Times are Longer
Due to the insane housing market and a high demand for mortgage refinancing, loan processing times are naturally becoming longer. The ongoing worker shortage across industries and the need to qualify borrowers remotely are also contributing to the slower process, taking anywhere from a couple of weeks to a couple of months for a traditional mortgage.
As pandemic conditions improve and banks and institutions onboard the right technology to help the remote lending process, loan processing times should improve. Consider this a temporary bump in the road as lenders figure out ways to make their new digital processes more efficient. There’s always a learning curve to conquer when companies shift to new processes.
The Reasons for Borrowing are Changing
Multiple stimulus checks have helped lower income families pay for much-needed necessities throughout the pandemic. However, many still faced job loss or the inability to work due to caring for children or elderly at-risk family members.
What’s more, many states are choosing to end the federal unemployment boost to encourage more people to go back to work. To add insult to injury, the supply chain still hasn’t gone back to pre-pandemic levels, keeping the price of necessities like groceries and personal care products higher than what they were just over a year ago.
All of these factors are contributing to a shift in the reasons why consumers may need to borrow funds.
Before the pandemic, many loans were used to support discretionary spending, family vacations, and new car purchases. During the pandemic, however, car sales declined, family trips were put on hold, and discretionary purchases were limited for many low income households so they could focus on purchasing the necessities.
Want-based borrowing is giving way to need-based borrowing. As a result, many lenders will likely see a decline in loans as consumers exercise caution when taking out a loan to cover the things they really need.
Responsible Banking Grows in Importance
Some more good news for consumers is that access to loans and credit grew during the pandemic. We recently covered the new FICO score in a recent blog, as well as some new major credit cards rolling out soon that will take into account your good banking habits in order to consider you for credit.
Practicing responsible banking has never been more important. It could be the difference between getting approved for a loan or credit versus being denied or settling for less favorable rates.
Lenders Will Likely Be More Cautious
With 57.4 million Americans filing for jobless benefits between March and August 2020, it’s not surprising that lenders are exercising more caution when vetting loan candidates. Widespread layoffs have investors wondering how loans will be repaid, leading lenders to implement stricter requirements. This includes a focus on credit score and changes to loan-to-value requirements. Loans that were being processed amid these changes may have been dropped altogether.
If your credit no longer meets loan requirements, now is a good time to review your credit report and dispute any errors, pay down your debt, and limit any discretionary spending to improve the appearance of your banking habits.
For more insight on how to whip your finances into shape, explore our free online financial resources.
