Pinching the Pocketbook

The Federal Reserve's dramatic tightening of credit will in time hurt every consumer who wants--or needs--to borrow for any purpose, from paying medical bills to buying a house. Says Saul Klaman, president of the National Association of Mutual Savings Banks: "Those who need credit most will have the most difficulty getting it. That's the way it always is." As prices inevitably rise, says Charles Lehing, senior vice president of New York's Chemical Bank, the people who will have the most trouble will be those on fixed incomes. Adds Lehing: "Most of these people don't have enough disposable income to become eligible to borrow, and the costs of their necessities will go up. It gets pretty rough. " But bankers also generally agree with Roderick M. MacDougall, chairman of New England Merchants National Bank in Boston: "The consumer is going to be badly hurt by these developments, but he'd be hurt a lot worse by inflation if it's allowed to continue. " Likely effects of the Federal Reserve's policies on the types of loans most sought by consumers:

MORTGAGE LOANS: Interest rates averaged 11.15% in early September, and are heading higher. Many bankers predict that they may reach 14% by year's end. But in 24 states, including Illinois, New York and Texas, usury laws hold rates to 12% or less. Lenders there are likely either to cut back on making home-buying loans or attach tighter conditions to them. A typical instance: First Federal Savings & Loan Association of Chicago has just shortened the repayment period on all mortgage loans to 25 years from 29 years, and now requires a minimum 25% down payment, vs. 20% formerly.

Builders are in trouble too. On construction loans, they generally pay 2 points above the prime interest rate that banks charge their top corporate customers. That means builders are paying 16 1/2% interest, vs. 15 1/2% only two weeks ago. Various charges may bring the effective interest rate to a towering 20% by the end of the year. Builders will start fewer houses and charge more for them. The National Association of Home Builders figures that the average price of a new house, now $64,000, will go up $1,000 by Dec. 31, and the combination of price increases and higher mortgage interest rates will add $92 to the monthly payments of anyone buying that $64,000 house on a 30-year loan.

PERSONAL LOANS: In many states interest rates on loans to buy a car or boat, finance a vacation or "for any worthwhile purpose," as the bankers say, have long been as high as the law allows--13.38% in New York on a three-year car loan. But bankers will tighten standards for receiving such loans; some say they will scrutinize a borrower's "relationship" with the bank. Translation: if you don't already have a savings or checking account there, don't bother asking for a loan. Bright spot: student loans will continue to be available, and at interest rates as low as 7%. Bankers figure that cutting back on student loans would be terrible public relations.

CREDIT CARDS: Again interest rates on unpaid balances are bumping the ceilings set by usury laws at about 18%. Those who accumulated a wallet full of plastic during the easy money days can be expected to run up charges as high as the card issuer will allow; frequently this credit limit is $1,000 per card. Ironically, the pay-as-you-go consumer who shunned offers of credit cards in the past will now find it hard to get them.

SMALL-BUSINESS LOANS: The entrepreneur who seeks credit to start or expand a business will have tough going. New York bankers talk about continuing such loans, but small businesses suffered especially during the credit squeeze of 1974. Says John J. Fowler Jr., president of Sterling National Bank in New York: "If a [small business] borrower can use the bank's money to make more money, then he can probably borrow at any rate. If he has to borrow mainly to keep himself in business, then he will have difficulty." Economist Richard Landry of the U.S. Chamber of Commerce fears that the owners of small retail stores will have to run cut-price sales to raise cash, and if these do not succeed the stores will be forced to lay off part-time workers, primarily women.

There are a few silver linings for consumers. Federal regulations keep interest rates on passbook savings accounts at pitifully low rates--5 1/4% for banks, 5 1/2% for savings and loan institutions--but money-market funds, some of which accept deposits of as little as $1,000 and invest the funds in Treasury bills and certificates of deposit, pay as much as 11%. Moreover, the yield will rise as interest rates generally go up.

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