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by Contributor

Image: QuinceCreative, Pixabay, License

(Aug. 12, 2020) — The lockdowns that have been implemented across the globe have been necessary in order to contain the coronavirus — but they also had significant consequences on the global economy. For instance, personal loans and credit card borrowing seem to be in massive decline due to the pandemic.

Both personal loans and credit cards are definitely invaluable financial tools for most people who need short-term credit at various points in their lives. However, the current crisis will make obtaining these far more troublesome.

Most forecasts conclude that consumer borrowing for 2020 will experience the sharpest decline recorded in modern history. This is, of course, due to the looming global economic recession triggered by COVID-19. Thus, even if you’re someone who uses credit cards responsibly, opening a new line of credit won’t be on terms as favorable as those you could’ve expected before the pandemic.

Most banks indicate that their lending of consumer credit via various methods will fall by at least sixteen percent. The global banking community has been recording aggregate consumer lending levels for 27 years. This is set to be the worst year on that record.

Conversely, business lending won’t be experiencing such a sharp decline. In fact, this lending sector is set to expand by a similar margin of fifteen percent. This is not a minuscule increase compared to the previous years, but an astounding one. To put things in perspective, business lending grew by only two percent in the year before the pandemic.

Still, this increase in lending isn’t a sign of economic strength. Across the developed world, COVID-19 triggered a wide variety of fiscal and other financial challenges. Both consumer households and businesses have been forced to adapt quickly. This has meant that most companies had to borrow vast amounts of money. And that’s not healthy lending, seeing as most of those funds were used by the companies that were simply trying to stay afloat; almost no-one was looking to expand their business in this period.

During the crisis, short-term credit was increasingly important to consumers, especially those struggling with liquidity. However, a lack of opportunities for new lines of credit — such as credit cards — is not only expected but very likely. This will have a devastating effect on purchasing power and will force everyone to consider their personal finance choices with more deliberation.

While responsible borrowing is undoubtedly advisable in regular times, it’s become absolutely vital in the COVID and post-COVID era. The detrimental financial effects of the pandemic are just beginning to become clear — and the borrowing of the average consumer will reflect that as well.

Most financial advisors agree that we shouldn’t disregard the different aspects of the coronavirus crisis and its effect on the consumers. Even if a vaccine is found tomorrow, the subsequent period will be quite stressful; a crisis that constitutes both a financial emergency and a health issue is not easy to contain.

Basically, the best thing people can do right now is to try to attempt to plan out their future finances as much as possible. This will cause some immediate stress but will save plenty of energy and time in the future. In the current global health climate, you can never be sure when you might need medical assistance, which, in most countries, means needing more money as well.

If you can create an emergency budget in order to ensure your future financial security, that’s pretty much the best thing you could do right now. Also, if there are any future payments that you expect to miss, contact your creditors and speak to them beforehand in order to come up with some sort of arrangement.

For instance, in the United Kingdom, there are payment holidays for personal loans and credit cards until the end of October — those couple of months could mean the world to someone who is in dire need of monetary assistance. If you don’t want to hurt your credit score by having officially missed payments, see if your creditors offer such features.

Still, we must note that this isn’t something you will likely want to do. Payment freezes are not a measure that you can enact whenever you want — so think long and hard before you do. We only advise doing so if you feel that this will be required for the sustained functioning of your household.

Of course, for the average consumer, all of this is easier said than done. Studies that were conducted before the pandemic reveal a staggering reliance of individuals in developed countries on short-term credit such as loans or credit cards.

By analyzing the purchasing habits of a few thousands of people, many researchers came to the conclusion that more than a third of adults use various lines of credit just to get by, simply to cover the most basic costs of living.

The jury is still out when it comes to post-pandemic credit numbers, but even before 2020, this was an issue. Almost half of all people in the UK and the United States have reported that they had unpaid debts of various kinds, which they would have to settle in 2020. Naturally, the coronavirus pandemic has made repayments exponentially more difficult.

This kind of heavy reliance on credit for basic sustenance is worrisome. The steady but confident rise of household-level debt will prove to be increasingly inadequate for people’s credit ratings and personal finances.

The current pandemic is only set to exacerbate such concerns. That’s why people have to be more careful than ever when it comes to borrowing and lending, even if we’re talking about small sums. We hope that this article was useful to you, that you’ve learned something new, and that you feel at least a bit more confident about the current financial situation. Make sure you are staying safe, and have a good one, guys!

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