Lending Standards Have Relaxed. Is This Such a Bad Thing?

If lenders have anything to do with it, the economic recovery could be far from over.

Matthew Frankel, CFP
Matthew Frankel, CFP
Apr 12, 2014 at 12:12PM

Source: Flickr / Florin Gorgan.

Do you remember just after the financial crisis when it was nearly impossible to get a loan for anything unless you had a fantastic credit score? Well, it appears those days might be over. According to recent data, right now is the easiest time in five years to get a new loan for a home or car. Easier, but responsible, credit will have positive effects on several areas of the economy. Consumer spending, real estate prices, and many corporations all stand to benefit here, so let's take a closer look at what easy credit could mean for you and your investments.

What do we mean by "easier" credit?
Now, credit may seem that it's getting easier to come by, but things are still pretty tight on a historical basis. Before the financial crisis, there were all sorts of  "crafty" loan products that were pretty much there so that anyone could qualify for a house, regardless of their income or credit rating. Does anyone remember the phrase "no-doc loan"? There were lenders offering "zero-down financing with a 575 credit score", even if the borrower was one day out of bankruptcy!

Source: Flickr / Okko Pykko.

Thankfully the shady loan products don't exist anymore, and lenders are relaxing their credit standards in a responsible manner. The notion that everyone should be able to buy a house is a faulty one, but so is the notion that only those with perfect credit will pay a loan back. For instance, the average credit score of consumers who received a mortgage peaked at 750 in 2012, which is universally considered top-tier credit by lenders.  The right way is somewhere in the middle of how things were in 2005 and how they were a few years after, and that's where we seem to be gravitating toward now.

According to bankrate.com, about 27% of U.S. consumers have a FICO score that is between 600 and 700, a range that is mostly considered "near-prime". So, if a certain lender lowers the minimum credit score to buy a new car from 660 to 640, they could be adding more than 5% of the population to their customer base, assuming an even distribution of scores in that range.

More companies benefit from home and car sales than you may think
The most interesting effect of easier credit has to do with the wide variety of companies that can benefit, both directly and indirectly. Direct beneficiaries will be the banks, who will be making more loans, as well as the auto companies and homebuilders who will be selling more cars and homes.

Source: Flickr / pdz_house.

But, there's more. If more people can buy new homes, retailers like Home Depot and Lowes will sell more building materials. Insurance companies will sell more homeowners' insurance. Roofers, plumbers, and electricians will all have more business. This is not to mention how the employees of these companies will have more work and earn more money to spend at other businesses.

When people buy more new cars, the railroads and other transportation companies will have more cargo to haul. Companies that produce the stereos, alarm systems, navigation systems, and other electronics for the car manufacturers will make more money. Governments will collect more taxes from the sale of more new vehicles, which could then be spent to fund more public sector jobs.

How it will affect your bottom line
As a consumer, you could start to qualify for loans and credit cards that you couldn't before, and you might start to get offers of lower interest rates than you have been seeing.

As an investor, this should help the overall economic recovery in the United States, but there are a few sectors that should especially benefit from easier credit. The banking, automotive, and homebuilding industries will gain the most, but looser lending standards should positively affect the entire market, provided the banks learned their lesson from the financial crisis and know when to say "no".

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