Banks Tighten Credit: What It Means for Borrowers

For years, credit was the silent fuel of the Spanish economy. Today it continues to circulate, but it does so more slowly, more expensively and with more filters. Although the European Central Bank maintains official rates at moderate levels, around 2%, the money that reaches homes and companies becomes more expensive in another way: higher bank margins, more solvency requirements and tougher conditions. The result is less accessible operations that begin to leave their mark on everyday purchasing and investment decisions.

The first thermometer of this tightening is the one dedicated to consumption, the most sensitive to risk and the most used by families. According to market data, personal loans are granted today with rates close to 6.5% APR, well above the levels that existed before the monetary change made by the ECB two years ago.

In practice, financing a vacation of 5,000 euros over three years means returning nearly 6,400 euros, that is, more than 1,400 euros in interest alone. Something similar happens with a loan of 3,000 euros for a family event, such as a wedding or communion, whose final cost can exceed 3,300 euros in just 24 months.

The purchase of durable goods does not escape this dynamic either. Financing a mid-range car, valued at 20,000 euros, for five years means responding to monthly payments that are around 390 euros and a total interest cost that can exceed 2,300 euros, even with a solvent profile. In the case of an 8,000 euro motorcycle, the increase in credit prices raises the final bill by several hundred euros compared to just two years ago.

Even so, consumer loans in Spain continue to grow at rates above 8% year-on-year, which shows that many families resort to debt to sustain their standard of living, even if they do so under worse conditions.

In this context, the Government has reacted with a draft that limits the maximum interest on consumer credit to 22% APR in certain products, especially revolving cards and quick loans, where the cost of money can multiply. The objective is to stop abuses in a segment where banking tightening translates more quickly into financial stress for households.

The mortgage market presents a more stable appearance, but does not hide the real restrictions. The average rate of new mortgages for home purchases is between 2.6% and 2.7% APR, a figure that is contained in historical terms. However, accessing this type of financing is more burdensome today.

Banks require greater prior savings, finance a lower percentage of the property price and apply stricter criteria. Buying an apartment for 200,000 euros requires contributing more than 60,000 euros between the down payment and expenses, and assuming a monthly payment close to 720 euros for 25 years. Over the life of the loan, the total interest cost can exceed 90,000 euros, even with interests that are apparently moderate.

Companies are not left out either. New loans to private entities are granted at rates close to 3.2%, a reflection of more prudent banking in the face of an uncertain economic environment. SMEs find it more difficult than large companies to finance their investments, which slows down growth projects and reliable hiring.

The paradox of savings

All of this contrasts with the other big business of banking: collecting savings. While credit becomes more expensive, deposits continue to be remunerated at very low levels. In many cases, entities barely pay interest on their clients’ money, and are below the European average. This combination of cheap savings and expensive credit explains a good part of the record profits in the sector that are being recorded in Spain in recent years.

This is a reality in which credit has not disappeared, but it has become more selective and expensive. A change that affects everyday decisions such as traveling, buying a car or accessing a home, and that forces families and companies to rethink their relationship with debt in an environment of less flexibility.