business

...As Long As Loan Rates Repel Consumers

Another damper on consumer spending is a markedly unfavorable borrowing environment. Interest payments on consumer loans are no longer tax-deductible, lenders have become increasingly wary of the creditworthiness of borrowers, and consumer loan rates are still in the stratosphere.

Economists Edward S. Hyman Jr. and Nancy Lazar at International Strategy & Investment Group Inc. note that both personal-loan and auto-loan rates fell about 17% during the 1981-82 recession. But thus far during the 1990-91 recession, they have remained at the high double-digit levels they reached in 1989. Indeed, auto-loan interest rates have been edging up recently and are actually higher today than they were in late 1982, when the last recovery began.

Meanwhile, the spread between the interest rate consumers pay to borrow money and the rate they receive on their savings is at a record high. While rates on personal loans posted by commercial banks in the second quarter averaged 15.15%, for example, money-market funds were paying consumers only about 5.59%. "Households whipsawed by meager earnings on their savings and high borrowing costs aren't likely to expand their use of credit," says Lazar.

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