Consumer-finance firms report third-quarter decline
“There’s been a sea change in interest rates and interest-rate expectations since the beginning of the year,” said Timothy Gill, chief economist and vice president of research at the American Financial Services Association (AFSA). This shift has contributed to a broad deterioration in business conditions for consumer-finance companies, according to a recent survey conducted by the trade group.
Lenders reported that business conditions worsened during the third quarter of 2026, with the outlook for the next six months remaining negative, American Banker reported. More than 47% of participants—a group including banks, mortgage providers, credit-card companies, and auto lenders—stated that their business environment declined between the second and third quarters.
Funding costs weigh on lender outlook
The survey, which tracks 38 participants, identified rising funding costs as a primary driver of the current downturn. Over 63% of respondents reported that their funding costs were higher in the third quarter compared to the second. This trend is expected to persist; more than 68% of firms anticipate further cost increases over the next six months.
This sentiment marks a sharp reversal from the previous year, when approximately 60% of respondents projected that funding costs would improve. The AFSA data aligns with an October survey from IntraFi, which found that the majority of bankers expect funding costs to continue rising over the next year. Gill noted that these higher costs are likely to “feed through to the rates they’re charging their borrowers.”
Loan demand drops as performance shows stress
Beyond funding challenges, the survey recorded a contraction in loan demand. The index for loan demand fell from 26.3 in the second quarter to -15.8 in the third quarter. For the first time since the survey began in 2024, the six-month outlook for loan demand dropped into negative territory, reaching -13.2.
Loan performance also showed signs of stress. The index for overall loan performance moved to -29.7, down from -18.4 in the second quarter. The decline was particularly pronounced among borrowers with subprime credit scores, with that specific performance index falling to -51.7. These figures suggest that lenders are encountering increased credit-quality pressures as households face ongoing budgetary challenges.
Broader economy remains resilient despite record lows
Despite the negative data, Gill highlighted that the broader U.S. economy has remained resilient, partly due to the growth of the artificial intelligence sector. While the current survey results represent record lows for the 11-quarter history of the study—with the “net improving index” for business conditions falling to -39.5—the outlook may shift once interest rate hikes conclude.
“Certainly the six-month outlook suggests that the current conditions for the next couple of quarters would be on the weak side,” Gill said. “But I think the cycle can turn fairly quickly.”
Questions regarding consumer-credit trends
Why are subprime loan performance metrics declining? The decline in subprime performance, which fell to -51.7 in the third quarter, reflects growing credit-quality pressures linked to household budgetary challenges. How do funding costs impact the average borrower? While the AFSA survey does not track specific interest rates charged to consumers, the increased cost of funds for lenders is expected to translate into higher borrowing costs for customers. What is the significance of the “net improving index”? The index measures the difference between firms reporting improved conditions and those reporting worsening conditions. A negative result, such as the -60.5 recorded for funding costs in the third quarter, indicates that a substantial majority of survey participants are experiencing or expecting deterioration in their business environment.
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