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Almost Every Kind of Loan Got Harder To Get in Fourth Quarter

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Key Takeaways

  • Loan officers are pulling back on lending, requiring higher credit scores from borrowers and raising interest rates they charge for all kinds of loans, a survey showed.
  • The survey shed light on how much high interest rates are making life harder for borrowers and lenders, who experienced decreased demand for credit.
  • The outlook could get brighter in 2024, as potentially lower interest rates from the Federal Reserve are expected to breathe some life back into demand for loans.

A boatload of data says the economy is doing great these days—but try telling that to the loan officers of the nation’s banks, who grew even more cautious about making loans in the fourth quarter.

That’s according to the Federal Reserve’s Senior Loan Officer Survey released Monday, which showed that banks toughened lending standards, raised interest rates, and generally grew more careful about who they lent money to in the fourth quarter, for nearly every type of loan. Borrowers also had less appetite for debt, with loan officers reporting falling demand across broad categories of loans amid high interest rates.

The January survey, which polled officers at 84 banks, shed some light on one way in which the Federal Reserve’s campaign of anti-inflation interest rate hikes has, by design, slowed the economy.

By holding the fed funds rate at its 23-year high, the Fed has pushed up rates on virtually every kind of loan, making money harder to borrow in hopes of bringing supply and demand back into balance. While the overall economy has stayed resilient, a reduction in lending by banks—a trend that persisted throughout 2023—adds friction to the economic machine. 

Take credit cards, for example—issuing banks raised required credit scores and pushed interest rates further above their own borrowing costs, while reporting less demand from consumers, according to the survey.

It was a similar story with auto loans, non-government-backed mortgages, commercial and industrial loans, and most kinds of credit that banks extend—reduced demand and tighter lending standards nearly across the board, with a few exceptions such as government-backed mortgages, which were unchanged.

While banks did continue to tighten credit generally, fewer of them did so than in the third quarter, suggesting that the trend may be easing.

Bank officers also said they expected more demand for loans in 2024 because of interest rates falling—the Fed is expected to cut its key interest rate at some point during the year, and forecasters expect rates for mortgages and other loans to follow suit. 

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