How and Why Do Consumers Use “Buy Now, Pay Later”?
In a previous post, we highlighted that financially fragile households are disproportionately likely to use “buy now, pay later” (BNPL) payment plans. In this post, we shed further light on BNPL’s place in its users’ household finances, with a particular focus on how use varies by a household’s level of financial fragility. Our results reveal substantially different use patterns, as more-fragile households tend to use the service to make frequent, relatively small, purchases that they might have trouble affording otherwise. In contrast, financially stable households tend to not use BNPL as frequently and are more likely to emphasize that BNPL allows them to avoid paying interest on credit-finance purchases. We explore below what drives these differences and consider the implications for future BNPL use.
Auto Loan Delinquency Revs Up as Car Prices Stress Budgets
The New York Fed’s Center for Microeconomic Data released the Quarterly Report on Household Debt and Credit for the fourth quarter of 2023 this morning. Household debt balances grew by $212 billion over the last quarter. Although there was growth across most loan types, it was moderate compared to the fourth-quarter changes seen in the past few years. Mortgage balances grew by $112 billion and home equity line of credit (HELOC) balances saw an $11 billion bump as borrowers tapped home equity in lieu of refinancing first mortgages. Credit card balances, which typically see substantial increases in the fourth quarter coinciding with holiday spending, grew by $50 billion, and are now 14.5 percent higher than in the fourth quarter of 2022. Auto loan balances saw a $12 billion increase from the previous quarter, continuing the steady growth that has been in place since 2011. In this post, we revisit our analysis on credit cards and examine which groups are struggling with their auto loan payments. The Quarterly Report and this analysis are based on the New York Fed Consumer Credit Panel (CCP), a panel which is drawn from Equifax credit reports.
How Do Banks Lend in Inaccurate Flood Zones in the Fed’s Second District?
In our previous post, we identified the degree to which flood maps in the Federal Reserve’s Second District are inaccurate. In this post, we use our data on the accuracy of flood maps to examine how banks lend in “inaccurately mapped” areas, again focusing on the Second District in particular. We find that banks are seemingly aware of poor-quality flood maps and are generally less likely to lend in such regions, thereby demonstrating a degree of flood risk management or risk aversion. This propensity to avoid lending in inaccurately mapped areas can be seen in jumbo as well as non-jumbo loans, once we account for a series of confounding effects. The results for the Second District largely mirror those for the rest of the nation, with inaccuracies leading to similar reductions in lending, especially among non-jumbo loans.
What Drove Racial Disparities in the Paycheck Protection Program?
Numerous studies of the Paycheck Protection Program (PPP), which provided loans to small businesses during the COVID-19 pandemic, have documented racial disparities in the program. Because publicly available PPP data only include information on approved loans, prior work has largely been unable to assess whether these disparities were driven by borrower application behavior or by lender approval decisions. In this post, which is based on a related Staff Report and NBER working paper, we use the Federal Reserve’s 2020 Small Business Credit Survey to examine PPP application behavior and approval decisions and to study the strengths and limitations of fintech lenders in enhancing access to credit for Black-owned businesses.
Do Economic Crises in Europe Affect the U.S.? Some Lessons from the Past Three Decades
In this post we summarize the main results of our contribution to a recent e-book, “The Making of the European Monetary Union: 30 years since the ERM crisis,” on the economic and financial crises in Europe since 1992-93, and focus on the spillovers of those crises onto the United States and the global economy. We find that the answer to the question in the title of this post is a (moderate) yes.
Financial Vulnerability and Macroeconomic Fragility
What is the effect of a hike in interest rates on the economy? Building on recent research, we argue in this post that the answer to this question very much depends on how vulnerable the financial system is. We measure financial vulnerability using a novel concept—the financial stability interest rate r** (or “r-double-star”)—and show that, empirically, the economy is more sensitive to shocks when the gap between r** and current real rates is small or negative.
The Great Pandemic Mortgage Refinance Boom
Total debt balances grew by $148 billion in the first quarter of 2023, a modest increase after 2022’s record growth. Mortgages, the largest form of household debt, grew by only $121 billion, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data. The increase was tempered by a sharp reduction in both purchase and refinance mortgage originations. The pandemic boom in purchase originations was driven by many factors – low mortgage rates, strong household balance sheets, and an increased demand for housing. Homeowners who refinanced in 2020 and 2021 benefitted from historically low interest rates and will be enjoying low financing costs for decades to come. These “rate refinance” borrowers have lowered their monthly mortgage payments, improving their cash flow, while other “cash-out” borrowers extracted equity from their real estate assets, making more cash available for consumption. Here, we explore the refi boom of 2020-21–who refinanced, who took out cash, and how much potential consumption support these transactions provided. In this analysis, as well as the Quarterly Report, we use our Consumer Credit Panel (CCP), which is based on anonymized credit reports from Equifax.
Does the CRA Increase Household Access to Credit?
Congress passed the Community Reinvestment Act (CRA) in 1977 to encourage banks to meet the needs of borrowers in the areas in which they operate. In particular, the Act is focused on credit access to low- and moderate-income communities that had historically been subject to discriminatory practices like redlining.
Younger Borrowers Are Struggling with Credit Card and Auto Loan Payments
Total debt balances grew by $394 billion in the fourth quarter of 2022, the largest nominal quarterly increase in twenty years, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data. Mortgage balances, the largest form of household debt, drove the increase with a gain […]
How the LIBOR Transition Affects the Supply of Revolving Credit
In the United States, most commercial and industrial (C&I) lending takes the form of revolving lines of credit, known as revolvers or credit lines. For decades, like other U.S. C&I loans, credit lines were typically indexed to the London Interbank Offered Rate (LIBOR). However, since 2022, the U.S. and other developed-market economies have transitioned from credit-sensitive reference rates such as LIBOR to new risk-free rates, including the Secured Overnight Financing Rate (SOFR). This post, based on a recent New York Fed Staff Report, explores how the provision of revolving credit is likely to change as a result of the transition to a new reference rate.