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If you’ve recently been looking to borrow money to pay for a home improvement project or to cover an unexpected healthcare or other emergency need, you may have thought Yikes! Why is this so much harder and more expensive than it used to be?!
It’s not just you. Loans are both objectively harder to get and more expensive right now. In this article, we’ll explore why that is, what needs to happen for loans to become more affordable, and what your best options are for borrowing money right now, if right now is when you need money.
How hard is it to get a loan right now?
According to the Federal Reserve Bank of New York, lenders rejected nearly 22% of loan applications between July 2022 and July 2023—the highest rate of rejection in more than five years. Unsurprisingly, the July Senior Loan Officer Opinion Survey found “the largest share of banks (a net 51%) reporting tighter lending standards for larger and medium-sized firms since the period following the onset of the pandemic.” In other words, it got a lot harder to borrow money after the pandemic. We’ll explain why later in this article.
How expensive is it to get a loan right now?
According to Bankrate, the benchmark Federal Reserve rate in July of 2022 was between 2.25 and 2.5%. The current benchmark rate is between 5 and 5.25%, which is the highest it’s been since 2007. That matters because banks use the Fed’s rates to help determine their own interest rates.
For perspective, in September of 2021 home equity lines of credit (HELOCs) had an average interest rate of 3.25%. In September 2023, the average interest rate on a HELOC was somewhere between 7.5% - 9%, more than double what it was two years ago. That would make a monthly payment on a HELOC of $100,000, $417 more each month. Other loan products have become similarly expensive.
Here’s a breakdown of what a $100,000 loan might cost if you got it today versus the last three years.
Here are the interest rates that determined those prices:
As you can see, both Reverse Mortgage and HELOC prices have more than doubled since 2020.
How did this happen?
The short answer is that interest rates went up — significantly. That made borrowing more expensive, so there’s less money available to borrow. And it means lenders are also being pickier about whom they lend to, since there is a higher chance of default from increased inflation rates.
Interest rates and COVID
Here’s the longer answer: We can attribute a lot of the higher interest rate to COVID. The federal government injected a lot of emergency funding into the economy to keep things going when everything went sideways during the pandemic. The Federal Reserve raised interest rates in order to control the inflation that happened, more or less as a result. Starting in March of 2022, the Fed raised interest rates for the first time since 2018, and hiked it another ten times by July 2023.
Most of us have heard more about the Fed in the last year or so precisely because of all these rate hikes. Here’s a quick introduction to what the Federal Reserve is and what it does. The Federal Reserve is the United States’ central bank. It is tasked with providing the country with a safe, flexible, and stable monetary and financial system. In order to do this, one of its jobs is influencing money and credit conditions in pursuit of full employment and–here’s the currently relevant bit–stable prices.
When the Fed raised the interest rate, it was increasing what banks charge each other for short-term borrowing. And that interest rate is a benchmark for lenders, who raised their rates as a result.
So, the current expense and difficulty in getting loans is to a significant degree a long-tail effect of the pandemic. The Fed raised interest rates to slow down pandemic-related inflation, particularly to help ease the financial burden on people who were ill or caring for others who became ill, and whose employment or housing was affected. Other economic effects of the pandemic are also contributing. For instance, lenders have noticed the delinquency rate for credit cards inching up, and they also know that when student loan payments start back up towards the end of 2023, that will put another dent in potential borrowers’ finances.
Banks have to keep their deposits stable to keep investors calm and regulators satisfied. But if interest rates, credit delinquency, and restarting student loan repayment weren’t enough to make lenders uneasy, three of the biggest four American bank failures also happened in 2023. As a result, the Federal Reserve has proposed increasing the amount of money banks are required to have on hand, meaning there would be even less money available for lending.
It isn’t just that the Senior Loan Officer Opinion Survey showed banks tightening lending standards, but that “the shift in bank lending standards has been the swiftest, and most dramatic, of any recent episodes of monetary policy tightening.” In explaining their tighter lending standards, banks most often cited “‘a less favorable or more uncertain economic outlook’ and ‘reduced tolerance for risk’ as the top reasons.”
Last, but not least, as loans became more expensive and more difficult to get, fewer people have been applying for them.
To compound matters, because interest rates have gone up, the appreciation on your home has slowed down as well, so how much home equity you have to borrow against is also affected. You’re getting less of it.
But if you need money now, the fact that loans are currently more expensive doesn’t mean you shouldn’t investigate a loan or other financial product. There’s no one-size fits all when it comes to these kinds of financial decisions.
How can I get a loan right now?
If you need money now, and you’re able to qualify for a loan while lenders are looking for higher credit ratings (620 or above) and a lower debt-to-income ratio (36% - 45%), don’t bother trying to time the market. You can always refinance a loan if rates go down, but if you wait, and the rates go up, then you’re stuck with those (even) higher rates.
What if I need money now and I don’t have great credit?
The Fed is projecting that inflation will be down to a much more manageable 2% by 2026, but what if you need a loan now? If you have a credit score under 620 but own your own home, a reasonable option might be home equity investment or a sale-leaseback arrangement. These financial products are not as sensitive to interest rate hikes because they’re not actually loans.
With a home equity investment, an investment company buys a share in the value of your home. When the term of the agreement is up, you can either pay the company what that percentage of your home is now worth, or you can sell the home. With a sale-leaseback arrangement, you are selling your home and then renting it back, so you don’t have to move, though you no longer own the home.
Because neither of those arrangements involves actually borrowing money, you don’t have to worry about your payments getting bigger. That doesn’t mean, however, that these products aren’t affected at all by the larger economy. The cost of the capital to the investor—that is, what it costs the investor to borrow money—is passed along to you. So, for example, the rent you pay in a sale-leaseback arrangement will be higher than it would have been before the pandemic and all these interest rate hikes.
While waiting for lower interest-rate loans would be ideal, there are circumstances in which waiting is not an option, like essential and costly medical care or rebuilding a part of your home after flood damage. If you or a family member need money now and have equity in a home, Wellahead can help you sort through the options. We’re a marketplace, not a lender, so we let you know what your options are based on your unique circumstances and we explain how those financial products work.
To learn more about the financial products mentioned here, read our primer on home equity investments and our guide to sale-leaseback agreements.
