As inflation stretches paychecks, some lenders report "late payment creep"

Earlier this week, the Bureau of Economic Analysis reported that in August, consumer spending rose more than 0.5%, even though people’s incomes were flat, after accounting for inflation.

Meanwhile, some loan officers surveyed by the Federal Reserve recently reported that they’re seeing rising delinquencies among both households and businesses.

At La Salle State Bank in Illinois, chief lending officer Chris Duncan said he’s been noticing some late payment creep in recent months.

“Folks who might have been paying their loans 20 days past due might now be paying them 25,” he said.

Duncan said he’s seeing this happen the most with mortgages and auto loans. His sense is that families are struggling with inflation.

“When those paychecks aren’t increasing at the same rate that your expenses are, those paychecks have to get stretched further and further and further. And eventually they don’t stretch anymore,” he said.

Duncan said he’s not that alarmed at this point. But he is reaching out to his customers to try and prevent those payments from getting too far behind.

“Once you get to 30 days past due, you’re two payments past due,” Duncan said. “Thirty days is last month’s payment and this payment. And it’s really hard for borrowers to catch up when they’re two payments behind.”

Inflation’s also making it hard for business borrowers to catch up.

Brad Bolton, CEO of Community Spirit Bank in Red Bay, Alabama, said his customers are struggling with higher fuel prices.

“This is mainly coming from construction-related businesses — loggers, timber harvesters, and truckers in general,” he said.

Many of those businesses can’t pass higher fuel costs on to their customers. “It squeezes their cash flow, and their profitability, and ultimately their ability to service their debt,” Bolton said, adding that his bank is working with those customers.

“If we need to restructure loans, to extend terms to lower payments, we’ve had to do that throughout the year,” he said.

Some banks are also being more cautious about lending.

“It’s better for us to tell someone no, or not right now, than it is for us to tell them yes, and create a crisis for them down the road,” said Robert James II, CEO of Carver Financial Corporation, which operates banks in Alabama and Georgia.

James said his banks are applying their existing standards more rigorously. “We’re being much, much more careful in not making exceptions, so we can ensure that borrowers are able to afford to meet the obligation.”

Instead of making as many loans, James said his banks are parking more money in safer investments, including short-term Treasuries.

“If we can earn 4%, close to 5%, in a relatively short-term security without taking very much risk or any risk, that’s a good strategy,” he said.

James added that the bank could always sell those Treasuries once it starts feeling comfortable making more loans again.