In contrast, lenders’ outlook for the next six months strengthened sharply and reached its highest level since Q4 2024, with an NII of +20.6.
“Against a complex economic backdrop which saw deterioration in labor market conditions together with an elevated, but stabilizing, pace of inflation, consumer lenders reported weakening loan demand in the third quarter compared to the second quarter,” said Tim Gill, AFSA’s chief economist and vice president for research.
“On the other hand, Q3 actions by the Federal Reserve to cut short-term rates, along with the continuation of a downward trend in long-term rates, contributed to an improvement in lenders’ funding costs. Looking ahead, signs of easing financial conditions, including further interest rate cuts, are fueling positive expectations for both overall and subprime loan demand and continued improvement in funding costs.”
Twenty-one percent of respondents reported an improved business environment, including 5.9% who said conditions improved considerably. By contrast, 26.5% reported deterioration, including 5.9% who said conditions worsened significantly.
Overall loan demand fell, with 35.3% reporting a decrease versus 23.5% reporting an increase. Subprime loan demand dropped more sharply, with an NII of -22.2. As for loan performance, the overall NII flipped to -8.8 from positive readings in prior surveys. The subprime loan performance index dropped to -14.3, compared to +8.8 in Q2 2025.
AFSA’s report found that funding costs improved for the fifth consecutive quarter, with an NII of +42.2, up from +26.3 in the prior quarter.
Looking ahead, 41% of respondents expect overall business conditions to improve over the next six months. Another 20.6% expect deterioration and 38% anticipate little change. Expected overall loan demand rose to an NII of +26.5, while subprime demand is projected at +14.8.
Expected funding costs strengthened sharply, with an NII of +57.6, but expected loan performance slipped to -8.8 overall and -44.4 for subprime loans.
“Signs of consumer stress are evident in the third quarter results, but lenders feel good about the direction that the economy is headed, driven by a lower interest rate environment,” said Celia Winslow, AFSA’s president and CEO.
“The divergence between overall and subprime loan performance expectations highlights the particularly challenging situation of lower-income and higher-credit risk groups in the current and near-future economic environment and are broadly consistent with other measures of credit delinquency.”
