Board of Governors of the Federal Reserve System

2. Borrowing by Businesses and Households

Vulnerabilities from business and household debt remained moderate

The balance sheet conditions of businesses and households remained stable in aggregate sincethe previous report. The level of total private nonfinancial-sector debt continued its moderate decline relative to GDP, with the debt-to-GDP ratio at its lowest level in two decades (figure 2.1). Trends in both the business and household sectors contributed to the decline in that overall ratio (figure 2.2). Business debt-to-GDP (blue line) edged down but remained near the 75th percentile of its historical range. The household debt-to-GDP ratio (black line) continued to tick downward and remained at more than 20-year lows.

For additional context, table 2.1 shows the amounts outstanding and recent historical growth rates of different forms of debt owed by nonfinancial businesses and households as of the second quarter of 2025.

Table 2.1. Outstanding amounts of nonfinancial business and household credit

Business debt increased slightly; the debt-servicing capacity of publicly traded firms was generally solid

The growth rate of nonfinancial business debt adjusted for inflation turned slightly positive to around 1 percent in the first half of 2025 (figure 2.3). Net issuance of risky debt—defined as issuance of high-yield bonds, unrated bonds, and leveraged loans minus retirements and repayments—was negative in the second and third quarters of 2025, driven by increased retirements of high-yield and unrated bonds (figure 2.4). Privately held firms account for roughly 60 percent of the total outstanding debt of U.S. nonfinancial firms. These firms tend to have less access to capital markets and primarily borrow from banks, private credit funds, and other institutional investors.

Gross leverage—the ratio of debt to assets—of all publicly traded nonfinancial firms was flat through the second quarter of 2025 (figure 2.5). Net leverage—the ratio of debt less cash to total assets—increased slightly in recent quarters. While both gross and net leverage remained high relative to history, so did the debt-servicing capacity of publicly traded firms. For publicly traded firms, where credit quality has been generally sound, interest coverage ratios (ICRs) were little changed since the April report (figure 2.6).

Debt-to-asset ratios increased on bank commercial and industrial loans but remained below pre-pandemic levels. This was true for both privately held and publicly traded firms (figure 2.7). In leveraged loans, the share of newly issued loans to large corporations with debt multiples—defined as the ratio of debt to earnings before interest, taxes, depreciation, and amortization—greater than 4 increased moderately to above the historical median (figure 2.8).

For leveraged loan borrowers, which are mostly, but not exclusively, privately held firms, gross and net leverage ratios declined modestly but remained above their historical medians since 2016. The median ICR for leveraged loan borrowers stayed near its historical lows. ICRs of smaller and riskier firms, including leveraged loan borrowers, are sensitive to interest rate changes due to their high leverage, high use of floating-rate loans, and short-term debt maturity structure. The volume-weighted default rate on leveraged loans stayed well below its historical median (figure 2.9, black line). However, defaults including distressed exchanges, which reflect the number of defaults and distressed loans that have been renegotiated between the borrower and the lender, continued to be elevated relative to history (figure 2.9, blue line).

Private credit remains a small fraction of outstanding nonfinancial business debt, and growth seemed to have slowed somewhat this year. Based on available data for privately held firms that have borrowing activities from large banks, the ICR for the median firm continued its downward trend over the previous few years, as higher interest rates have contributed to reduced earnings and increased the cost of debt servicing. The average ICR at issuance for private credit borrowers increased but remained low at a value of around 2. Aggregate leverage of privately held firms was similar to the previous report and remained near its historical median. The recent bankruptcies of two privately held firms, an auto parts supplier and a subprime auto lender, so far appear to be isolated events. However, these examples highlight that unexpected losses could arise from opaque off-balance-sheet funding arrangements that may be used by certain privately held firms.

Credit availability to small businesses tightened, and delinquencies remained above pre-pandemic levels

According to the August 2025 National Federation of Independent Business's Small Business Economic Trends Survey, the share of firms that borrow regularly has trended down since November 2021.⁴ Measures of small business loan originations were level through the first half of 2025. Data from the Small Business Lending Survey showed that banks continued to tighten credit standards.⁵ Interest rates on small business loans have been largely stable in recent months and remained near the top of the range observed since 2008. Short-term (up to 90 days) delinquency rates ticked up but were still substantially lower than during the pandemic or the Great Recession. Long-term (more than 90 days) delinquency rates have levelled off recently but remained above their pre-pandemic levels.

Outstanding household debt adjusted for inflation was little changed

Outstanding household debt adjusted for inflation has been little changed over the past two years. The share of that debt that is currently owed by households with a subprime credit rating has risen somewhat, reflecting in part the rise in consumer delinquencies and a related deterioration of those borrowers' credit scores (figure 2.10). The ratio of total required household debt payments to total disposable income (the household debt service ratio) was little changed since the last report. Most household debt has fixed interest rates, and the higher interest rate environment of the past few years has only partially passed through to household interest expenses.

Mortgage credit risk remained low

Mortgage debt accounted for roughly three-fourths of total household debt. Housing leverage—measured as outstanding mortgage loan balances relative to home values—remained subdued (figure 2.11). When measured relative to market prices (blue line), outstanding mortgage balances continued to sit well below previous peaks. Outstanding mortgage loan balances relative to an estimate of home values from a model using rents and other market fundamentals were somewhat higher but remained far below earlier peaks (black line). The overall mortgage delinquency rate remained at the lower end of its historical distribution in the first half of 2025 (figure 2.12). Delinquency rates remained subdued due to large home equity cushions (figure 2.13) and strong underwriting standards.

New mortgage extensions declined slightly for borrowers with a prime credit score (the group with the largest share) and for borrowers with near-prime credit scores but increased slightly for borrowers with subprime credit scores over the past year (figure 2.14). As of the fourth quarter of 2024, the early payment delinquency rate—the share of balances becoming delinquent within one year of mortgage origination—remained somewhat above the median of its historical distribution.

Consumer delinquencies remained high by historical standards

Consumer debt accounted for the remaining one-fourth of household debt and consisted primarily of student, auto, and credit card loans. Balances were broadly unchanged in inflation-adjusted terms relative to the previous report (figure 2.15).

The average maturity of auto loans at origination for used cars was near historical highs for borrowers with a nonprime credit score (figure 2.16). On balance, longer-maturity loans tend to have higher default risks, partly because such loans have a higher risk of falling deep into a negative equity position, which can lead to consumer defaults. The share of auto loans in delinquent status was largely unchanged from the previous report and stood at a level somewhat above its historical median (figure 2.17).

The stock of outstanding credit card debt shifted slightly to subprime borrowers over the first half of 2025 (figure 2.18). Credit card delinquency rates remained flat in the first half of 2025 after reaching their highest level since 2010 in the previous year (figure 2.19). The stabilization of credit performance has been broad based, with delinquency rates leveling off across credit score and income groups.⁶ The overall increase in credit card delinquencies since early 2022 was attributable primarily to elevated delinquencies among borrowers with a nonprime credit score and reflected in large part looser underwriting standards and large growth in inflation-adjusted revolving credit over the pandemic period.

Delinquencies on student loan debt increased significantly in the first half of 2025, reflecting the resumption of student loan repayments and reporting of delinquent loans to credit bureaus. However, student loan borrowers have not yet shown much greater difficulty in meeting their non-student loan debt payments relative to the overall population.

 

References

 

 4. This survey's data are available on the National Federation of Independent Business's website at https://www.nfib.com/surveys/small-business-economic-trends. Return to text

 5. This survey's data are available on the Federal Reserve Bank of Kansas City's website at https://www.kansascityfed.org/surveys/small-business-lending-survey/. Return to text

 6. Income and credit score are not strongly correlated; see Rachael Beer, Felicia Ionescu, and Geng Li (2018), "Are Income and Credit Scores Highly Correlated?" FEDS Notes (Washington: Board of Governors of the Federal Reserve System, August 13), https://doi.org/10.17016/2380-7172.2235. Return to text