Prepare Now for a Historic Consumer Credit Comeback

By James White, General Manager, Banking Industry at Total Expert

Published on June 18th, 2025 in Banking Trends

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Executive Summary

High interest rates have clamped down on consumer borrowing for several years, as customers wait for a better deal.
But the long wait may have conditioned some consumers to accept a “new normal” in which attractive rates are higher than in the past.
Banks must be prepared to scoop up the cascade of new borrowing when it happens — and it may occur at higher rates than expected. In fact, it may have started already.

Borrowing money has been expensive lately, particularly in comparison to recent banking history.

That high cost has diminished borrower interest or the ability to use debt, even for necessities. Many in turn have opted to wait to borrow. For banks and credit unions, lending has been in a lull across mortgages, home equity lending, auto loans, and consumer loans.

For borrowers, high interest rates are also about more than cost of credit. Their motivations for borrowing are driven by needs and wants, both of which are more important to them than the money itself. Now, across those who need and those who want to borrow, an alignment is emerging: Whatever they’re buying, they’ve been waiting.

Those who must borrow because they must move, for example, are the people who’ve provided most mortgage lending volume during the last two years. But many more borrowers have waited for lower rates. It is this desire for a “deal” that should be on the minds of banking executives.

This year, borrowers are already showing that they will return to the market in droves once loan pricing crosses a certain psychological threshold. Here’s what that boundary is, why it could lead to a credit comeback, how loan demand could impact deposit competition, and how institutions — particularly in the marketing department — can drive growth.

The Psychological Boundary: Pricing

A 7% mortgage rate was once unthinkable. Now, with each passing week and month with Fed Funds where it is, that “high” 7% interest rate becomes more normal.

Set that change in perception alongside the fact that some delays in borrowing are for people waiting on something they need, things like a house that fits their family, or a replacement vehicle. These “soft needs” are not as urgent as moving for a new job, but they are more urgent than pure wants.

There are also borrowers who want to buy something, but have been waiting. These are people who’ve been driving too far to work, wanted to update their kitchen since 2023, wanted a new car since before 2018, or to take a vacation for the first time since rates rose by over 400%.

Two kinds of psychological pressure now sit behind these needs and wants: The fatigue from waiting, and a worry about missing rates at a low point.

So, what would happen if loan rates declined? What if 7% declined to 6%, and then to 5.95%?

It turns out the market has already told us what it would do if rates came close to 6%.

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Unleashed by ‘Meaningful’ Declines in Rates

A survey by Bank of America published in May reported that 60% of U.S. homeowners and prospective buyers surveyed earlier that year “could not tell whether it was a good time to buy a home.” It was a high point for borrower uncertainty, up from 57% last year and 48% in 2023.

You can see the borrowing uncertainty affecting mortgage origination volumes, which were down to $426 billion in the first quarter of 2025 from $465 billion in the fourth quarter of 2024.

Yet, that’s not the complete picture. Just as the bank was gathering data — from January to March 2025 — what was happening in the mortgage department? Mortgage applications were booming, passing the typical seasonal uptick in applications by 20%. (That’s an enormous increase for one of the nation’s largest lenders.)

“We’re seeing a steady increase in home buying activity, and it’s beyond what we would normally see from a seasonality perspective,” Matt Vernon, head of consumer lending at the bank, told Reuters at the time. “We’ve seen an 80% increase in our applications from January to now, and normally we would see around a 60% increase.”

Borrowers appeared uncertain, so what fueled that 20% bump over seasonal trends?

Vernon attributed the surge in applications to a drop in U.S. 10-year bond yields, a benchmark for mortgage rates, which subsequently pushed the 30-year mortgage rate down to 6.1% for a time.

Hold on. A 6.1% mortgage rate is still double the 3%-ish rate that prevailed before 2022. Why did it create borrowing?

Lawrence Yun, the National Association of Realtors’ chief economist, described it this way in a recent release, “Pent-up housing demand continues to grow… Any meaningful decline in mortgage rates will help release this demand.”

A 1% decrease in rates — from 7% to 6% — results in a nearly 15% reduction in mortgage interest. But the downward bump feels even steeper psychologically. Just as in other retail industries that incentivize purchases with $X.99 pricing, a change in the first number of the price — even though the actual difference is 1 cent or 1 basis point — feels bigger than the move from 6.2% to 6.1%. The dual pressure from pent-up loan demand only adds more significance to small price changes.

Bank of America, it should be noted, also saw mortgage applications spike without any major movement from the Federal Reserve. The housing market now has the highest inventory levels in nearly five years, allowing home buyers to negotiate for better prices. The market wants a revival; we’re just waiting for people to feel less uncertain.

Dig deeper:

Pent-Up Demand, Even Outside of Mortgage

Even outside of home lending, significant pent-up economic activity waits for a perceived improvement in interest rates.

Data suggests vehicles are one of those areas. The average age of American automobiles continues to climb, reaching 12.8 years in 2025, according to new analysis from S&P Global Mobility.

Many Americans now face a “spend on repair or spend on a new vehicle” situation for their vehicle. S&P explains, “when vehicles reach the six- to 14-year window, they require more frequent maintenance, repairs, and parts replacements. With the 2015-2019 model years now entering this prime age range, a wave of service demand is expected to hit repair shops, part suppliers, and service providers across the country.”

Americans who were already waiting to buy a new vehicle may soon reach a breaking point (pardon the double meaning) where borrowing to buy a new car becomes more appealing than borrowing to repair an old one.

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Ripple Effects on Deposits

Between the Great Recession and 2021, the large nationwide banks had the lowest cost of funds. That’s not true anymore. They are paying more for deposits now than the smaller institutions.

This is where Bank of America’s loan demand from earlier this year comes home to other institutions across the country. If large banks experience increased loan demand in 2025, and they are already paying more for deposits, what is likely to happen in every market where one of these big five banks has a branch? They can afford to acquire depositors.

Depositor perception is also not likely to be forgiving for institutions lowering deposit rates. They have become acclimatized to the rates of the last two years. Will those who’ve had 4% or 5% rates accept 3% in their high-yield savings account? What if the Fed leaves rates without material change for longer than many institutions now expect?

Depositors are likely to resist deposit rates of less than 4%, just as they have resisted mortgage rates above 7%. As The Financial Brand recently reported, U.S. Treasury yields allow them to be very choosy.

Graphic: U.S. Treasuries Pay Far More Across Duration

Deposit Products	National Deposit Rates	Treasury Yield
Savings	0.41	4.33
Interest Checking	0.07	4.33
Money Market	0.62	4.33
1-Month CD	0.24	4.33
3-Month CD	1.42	4.32
6-Month CD	1.60	4.23
12-Month CD	1.77	4.03
24-Month CD	1.49	3.99
36-Month CD	1.25	3.99
48-Month CD	1.27td>	3.99
60-Month CD	1.24	3.96

Absent a serious economic downturn, today’s borrowers aren’t waiting for a return to “normal.” They’re ready for lenders to redefine it.

How Institutions Grab Growth

How does a bank find a borrower for whom a 6.1% mortgage is a deal? How do you find someone who wishes they could move closer to work? How about someone who knows they’ll need to replace their car soon?

Marketing thrives on learning this type of information, especially with the help of automation tools available for data and email today.

The same applies to deposits. The national savings account rate is 0.41%. Which depositors are unhappy with their current HYSA, money market, or certificate?

Often, knowing what people need is as simple as asking a few questions. To become their source for their next loan or deposit is about offering to help now by keeping them informed about current loan rates and deposit pricing.

Knowing who has pent-up demand for credit is one of the best ways to prepare for growth should credit applications spike 20% above their historical levels.