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The COVID-19 pandemic affected every economic sector and lending was hit one of the hardest. The demand for loans has increased exponentially. However, lenders have become more risk-averse. Therefore, they are making it harder to get any kind of loan now. In fact, the lending industry has almost stopped functioning worldwide. Only the lenders with government backing through a variety of support programs remain on the scene.
Why Are Lenders So Risk-Averse Today?
The answer to this is simple. The world is facing one of the worst global economic recessions in history. And this one might be long-term as well. The result of this is that the amount of debt has already grown to all but unmanageable levels. And it would continue to grow.
Simply put, the chances of borrowers actually paying off their debts are exceedingly low at the moment. Also, the situation isn’t likely to improve any time soon because the recession is only starting.
There is a lot of uncertainty in any predictions regarding the future of the global economy. However, no one can argue that it will take a while to recover. This problem is only exacerbated by the difficulties of obtaining loans. Those were hard enough to get even before the recession. However, the situation has been improving over the last few years, especially in the small business lending sector. Alternative lenders made such loans much more accessible, which helped many small businesses to flourish.
However, those same businesses are rapidly going bankrupt now. And they default on their loans adding to the overall economic devastation brought on by the pandemic.
Do Lenders Help Improve the Situation in Any Way?
As the risks to lenders are completely justified, it’s not surprising that they cut down their business. The majority of loan options available today are the ones that come with a government guarantee.
The Paycheck Protection Program is one of the best examples of government-backed loans available today. This program offers business loans that can be used for payroll and essential costs like utilities and mortgage payments. It aims to support businesses through the lockdown period and encourage them to keep their employees on the payroll. The PPP is a US program but many other governments have options similar to it.
For the lenders, participating in this type of program is essential because they get a full government guarantee. This means that should the borrowers default, the government will cover the debt anyway. In essence, this is as risk-free as it can get for a lender in this uncertain economic situation.
However, not all lenders can participate in this type of program. Therefore, the number of lending options will continue to go down.
At the moment, eligible lenders also get government baking in various types of debt relief. For example, you can postpone some mortgage and loan payments without incurring additional debt or facing foreclosure. However, all such measures are limited in time. They are also available only from lenders eligible for government support.
Will the Lending Scene Improve Soon?
The biggest problem is that all government aid programs have limited funding that is running out fast. Another wave of funding can only offer a small measure of help because the demand for loans is still greater than the proposition.
Moreover, for all the good these programs do, they are only available to eligible businesses and individuals. This means that millions of people are unable to use these benefits at all. Therefore, they turn to the scarcely available payday loans and even loan sharks.
The result is that people and economies drown in debt. Unfortunately, the chances of paying off these debts are almost non-existent. All this contributes to a rapidly cascading economic recession.
With no business loans, owners have no choice but to lay off their employees. People and businesses without income go bankrupt, which means they do not contribute to the consumer economy. This creates a devastating cycle that will need a huge infusion of cash to break.
However, at the moment, that infusion is impossible because of the limited lending capacity. All in all, it’s impossible to predict when and by how much the lending sector will recover. One thing for sure, this won’t happen soon. Therefore, businesses and everyday citizens who rely on payday loans and credit cards will be on their own for a while. Quite possibly, many of them will be crushed by the debt they have already incurred.