Government Struggles To Keep Loan Rates Affordable

The good news for many Americans is that now may be one of the best times to borrow money for a house, car, or small business.

Following the heavy hit the credit markets suffered last year which prompt a government effort to stop the nation’s financial system from totally collapsing, interest rates have reached historic lows.

Yet, before everyone get an itch to run out and get financing, it is important to note that financial institutions are making it far more difficult to obtain a loan than they have in recent year. In fact, banks are requiring more collateral, larger down payments, and very detailing financial histories from prospective borrowers.

Worse, these requirements are for those with good credit. It indicates that everyone else may be out of luck. Restrictive lending may be the norm for the near future. According to some figures, almost 7 out of 10 applications were approved and financing book of 2005, but that number had dropped to 5 by the end of 2008.

Credit card debt, and other revolving credit, dropped $6.1 billion or 8% on an annualized basis. This may mean that consu mers are struggling to find available credit so they must reduce their spending.

Certainly, businesses and consumers alike are now finding it easier to get a loan now than when the crisis was at its peak late last year. However, those improvements may be somewhat misleading. Lending – particularly for housing – is being reinforced by money provided by the federal government.

The Federal Reserve has provided low-cost loans to banks across the country totally about $340 billion. In addition, the central bank bought $625 billion worth of mortgage-backed securities to help cut down the interest rates for housing loans. The FDIC has offered to guarantee $300 billion in bank debt; it would be another way to help banks borrow at lower interest rates.

Yet, there is debate about how long this government aid should last. Timing seems to be a major area of contention. There are no clear answers since analysts appear to be split over how soon is “too soon” and what consequences there might be for the lending markets if support is withdrawn prematurely.

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