Borrowing Bonanza: US Households Embrace Credit Even As Interest Rates Reach 20-Year Peaks

U.S. households are displaying a strong appetite for credit, even in the midst of a challenging financial environment as interest rates hover at over 20-year highs.

Consumer credit is gathering steam, increasing from $7.24 billion in May to $17.85 billion in June, defying the market expectation of $13 billion, the Federal Reserve reported Monday. The print is above the 6-month average of $16.9 billion.

Consumer credit showed an annual growth rate of 4.3% in June, with a seasonally adjusted annual rate of 4% for the entire second quarter.

Chart: US Consumer Credit

The resilience and borrowing excitement shown by U.S. households reflect a still healthy labor market, with the unemployment rate tipping lower to 3.5% in July, and growing consumer confidence amid an improved economic outlook. Nevertheless, the endurance of consumer credit could face challenges ahead, as interest rates on crucial loan products soar to unprecedented levels in the upcoming months.

Key Highlights Of Latest Fed’s Consumer Credit Report

• Nonrevolving credit, like loans for vehicles and other loans excluded from revolving credit (e.g., mobile homes, education, boats, trailers, or vacations), experienced a 6% annual increase in June and a 3% quarterly increase during Q2.

• Revolving credit fell at a 0.6% annual rate in June but surged 7.1% q/q annualized rate in Q2.

• The average annual interest rate on a 60-month new car loan jumped to 7.81% in Q2 2023, a significant increase from 4.85% in the same quarter last year.

• Similarly, credit card interest rates surged to an average of 20.68% in Q2 2023, up from 15.1% in the same period the previous year.
  
• Personal loan rates also followed suit, with an average interest rate of 11.48% during the quarter, compared to 8.73% in the corresponding quarter of the previous year.

• Student loans were equal to $1.76 trillion in June 2023, down from $1.77 trillion in Q1.

• Motor vehicle loans surged to $1.53 trillion in June 2023, up from $1.52 trillion in Q1.

Read now: What Economists Expect When Key Inflation Data Arrives Thursday As Market Looks For Clues On The Fed’s Next Move

Photo: Shutterstock