Consumer lenders reported their weakest business conditions on record in the third quarter of 2026, as rising funding costs and growing financial pressure on borrowers weighed on the industry, according to a new survey by the American Financial Services Association (AFSA).
The association's latest Consumer Credit Conditions (C3) Index found that its Net Improving Index (NII) for overall business conditions fell to -39.5, down sharply from -5.3 in the second quarter. Nearly half of surveyed lenders (47.4%) reported worsening conditions, while just 7.9% said conditions improved.
Funding costs were the weakest-performing measure in the survey. The NII for funding costs dropped to -60.5 from -33.3 in the previous quarter, with more than 63% of lenders reporting higher costs and only 2.6% experiencing a decline.
The results come amid higher interest rates and rising Treasury yields. The Federal Reserve raised its benchmark interest rate in September for the first time since 2023, while the 10-year Treasury yield reached its highest level since 2007.
Lenders also reported worsening loan performance, particularly among borrowers with lower credit scores. The NII for outstanding loan performance declined to -29.7 from -18.4, while the subprime loan performance index fell to -51.7 from -41.4, marking a new survey low. Nearly 59% of lenders serving subprime borrowers reported deteriorating performance.
Consumer demand for credit also weakened following a stronger second quarter. The NII for overall loan demand fell from +26.3 to -15.8, while demand for subprime loans declined from +26.7 to -6.9.
"Families face real affordability pressures, and the cost of lending to them is climbing," said AFSA President and CEO Celia Winslow, who urged policymakers to consider the potential consequences of measures that could restrict access to consumer credit.
The industry's outlook suggests conditions could deteriorate further. The NII for expected business conditions over the next six months registered -28.9, a survey low, with half of respondents anticipating further declines. Lenders also expect funding costs to worsen, with the corresponding index falling to -63.2 from -25.0.
Personal installment lenders reported negative readings across all six current-condition measures, with an overall business conditions NII of -55.6. Vehicle finance lenders experienced the sharpest increase in funding costs, recording an NII of -69.2, although demand for subprime auto loans remained modestly positive at +5.6.
AFSA Chief Economist Tim Gill said rising borrowing costs are particularly consequential for consumers with fewer credit options.
AFSA serves over 410 national and regional member companies in consumer credit, vehicle finance, mortgages, and traditional installment lending, many of which operate or hold licenses in Texas. AFSA also collaborates with regional entities like the Texas Consumer Credit Coalition and the Texas Consumer Finance Association.