Do we really need help with getting more debt?
Today a new rescue program called the Term Asset-Backed Securities Loan Facility (TALF) was announced by the Treasury and Federal Reserve to support owners of securities backed by credit card debt, student loans, auto loans, and loans approved by the Small Business Administration. Supposedly this initiative will free up consumer credit, but the question is, are we really in need of more debt right now?
This week I received a letter from one of my credit card issuers that informed me that they closed one of my inactive accounts. I have not touched that card for more than three years, so it was fine with me. In the same week, I received about five to ten different credit card preapproval letters that I could use to replace the one account I lost. Although this is anecdotal, most people I know already have enough credit cards and getting a new card is as easy as going to the mailbox and returning a form. I have yet to read a news report that name actual credit card issuers who are lowering their credit card approval rates so it seems that the credit card markets are far from frozen.
As to auto loans, it seems that lenders are tightening their lending criteria. Edmunds.com says that consumers with average credit will be required to make down payments as high as 20% and loan terms are shorter. Basically, loans are still being made, but consumers need to have good credit, and that does not seem like a bad thing. If auto loans are truly impossible to get, then consumers could simply save up and pay in cash. In many instances, used cars are not so prohibitively expensive that you have to finance it with a loan.
When it comes to student loans, it seems that private loans are frozen for the most part, but there are still plenty of opportunities for students to get federally backed loans. Again, this may not be a bad thing because private loans usually carry much higher interest rates than federally backed loans. If enrollment truly drops significantly in universities due to lack of financing for students, then it is possible that many private universities may consider reducing their fees or handing out more grants, and that is also good for the consumer.
Finally, there are the small business loans. According to this article in BizJournals the volume of small business loans made so far this fiscal year through the Small Business Administration's 7(a) loan program is 55 percent below the same period a year earlier due to the inability of lenders to sell their loans on the secondary market, reduced demand for credit, and tighter lending standards. It is possible that the TALF program could open up the secondary market for these loans again and more small businesses can be started, but it may be that many entrepreneurs are shying away from starting a business in the current economy.
Right now, I do not know how much this new plan will help consumers, but it would certainly help the investors in these debt backed securities right away. I really do not think Americans need any help in getting more credit card debt or loans to buy flashy cars they cannot afford, but debt to start small businesses may create new jobs and spur economic growth. For the most part, I think this is a good time to eliminate debt, and not acquire more.
Have you had trouble getting credit recently? How much do you think this new rescue program will affect you?