Why Consumers Turn to Small-Dollar Credit

CFSI Center for Financial Services Innovation Why Consumers Turn to Small-Dollar Credit To see the report, visit our website http://www.cfsinnovation.com/content/know-your-borrower-four-need-cases-small-dollar-credit-consumers Small-Dollar Loans 15 Million Americans Use Them With limited access to traditional lines of credit, about 1 in every 11 low and moderate-income Americans turns to small-dollar loans for quick access to cash. These loans can be expensive and difficult for consumers to repay. Some small-dollar loans require full repayment within 2 weeks and charge fees or interest as high as 400% APR. NOV l$|| $$ PAYDAY PAWN DIRECT DEPOSIT AUTO TITLE INSTALLMENT LOANS LOANS ADVANCE LOANS LOANS Types of Smal|l-Dollar Credit Consumers Consumer research identifies four major reasons why borrowers use small-dollar loans.* 30% 32% EXCEEDING INCOME MISALIGNED CASH BORROWERS spend more than they make and are among the heaviest users of credit, accessing smaller loan amounts for everyday FLOW BORROWERS frequently access smaller credit amounts for the periodic payment of bills due to a mistiming of income and expenses expenses 32% 9% PLANNED PURCHASE UNEXPECTED are a unique niche of users in the SDC market making a relatively large, planned purchase often related to a personal asset, such as a car, furniture or household EXPENSE BORROWERS access small-dollar credit somew hat infrequently for relatively larger expenses related to unexpected or emergency events appliance *Includes multiple reporting of credit needs Know Your Borrower Four Types of Small-Dollar Credit Consumers Understanding the needs of borrowers is a first step in developing higher-quality small-dollar credit products. UNEXPECTED EXPENSE Borrowers BORROWER PROFILE WHO Ivy, 70 OCCUPATION Retired MONTHLY INCOME $2,380 MONTHLY EXPENSES $1,700 -$2,000 CREDIT USE Infrequent Emergencies As a retire e, Ivy has a fixed income and doesn't rely on small-dollar lo ans regularly, only for large expenses related to an unexpected or emergency event. With a limited budget, Ivy can't afford health insurance and takes the bus to save money. Her elderly mo ther depends on her financially, which limits her ability to put money aside in a savings fund. Without credit cards, her only option was to take out a small-dollar loan during the holidays when the water main inside her one bedroom condo broke, damaging the bathroom. BORROWER STATS AVG. HOUSEHO LD SDC PRODUCTS USED INCOME NOV INSTALLMENT PAYDAY AUTO TITLE 29% 26% 25% $33k PRIMARY LOAN USES LOAN AMOUNTS % W/ SAVINGS PRIOR TO CREDIT USE # LOANS USED IN A YEAR CAR REPAIR 1 to 2 LOANS < $500 32% 47% 57% 50% MEDICAL BILLS 3 to 5 LOANS $500 to $1,000 12% 30% 18% FAMILY/FRIEND 6 + LOANS > $1,000 11% 23% 25% MISALIGNED CASH FLOW Borrowers BORROWER PROFILE WHO Jane, 56 OCCUPATION Administrative Assistant & Hotel Staff MONTHLY INCOME $2,000 - $2,400 MONTHLY EXPENSES $1,600 - $2,000 CREDIT USE Occasional to Frequent Despite working two jobs, Jane sometimes finds herself short on money to pay the bills. Her tight budget relies on income from her second job, which varies from week to week. Jane has also struggled to manage her expenses in the past which led her to file for bankrup tc y. Without access to credit cards, Jane uses payday loans when she's behind on her phone bill or to make a rent payment. She says having the ability to pay bills in ins tallments and to time the payments around her payday helps her manage her uncertain finances and avoid late fees. BORROWER STATS AVG. HOUSEHOLD SDC PRODUCTS USED INCOME NOV PAYDAY PAWN AUTO TITLE 56% 28% 26% $31k LOAN % W/ SAVINGS PRIOR TO PRIMARY LOAN # LOANS USED USES IN A YEAR AMOUNTS CREDIT USE ill 24 UTILITY BILLS 1 to 2 LOANS < $500 52% 23% 67% 26% RENT 3 to 5 LOANS $500 to $1,000 24% 35% 19% 6 + LOANS > $1,000 GENERAL LIVING 23% 35% 14% EXCEEDING INCOME Borrowers BORROWER PROFILE WHO Nicole, 27 OCCUPATION Debt Collector at Bank MONTHLY INCOME $2,100 MONTHLY EXPENSES $2,200 CREDIT USE Frequent Nicole's expenses regularly exceed her income. She and borrowers in similar financial situations are most likely to repeatedly us e very short-term credit and rollover the lo ans o ver longer perio ds of time. To cover the costs of her grandmo ther's medicine, Nicole to ok out a payday loan. However she is unable to re tire her debt so she renews the loan every two weeks. Nicole also used an advanced deposit lo an to cover a car insurance payment, w hich she renews every two weeks. BORROWER STATS AVG. HOUSEHOLD SDC PRODUCTS USED INCOME NOV PAWN PAYDAY INSTALLMENT 41% 39% 14% $27k % WITH SAVINGS PRIOR TO CREDIT USE LOAN PRIMARY LOAN USES # LOANS USED IN A YEAR AMOUNTS $ GENERAL LIVING 1 to 2 LOANS < $500 47% 33% 77% 23% UTILITY BILLS 3 to 5 LOANS $500 to $1,00 O 27% 26% 13% RENT 6 + LOANS > $1,000 14% 41% 10% PLANNED PURCHASE Borrowers BORROWER PROFILE WHO Daniela, 35 OCCUPATION Janitor MONTHLY INCOME $2,400 MONTHLY EXPENSES $2,000 CREDIT USE Infrequent / Planned Daniela's husband works in construction, and together they are able to stay on top of their expenses and not rely on borrowing regularly. High fees prompted Daniela to cancel her credit card, but it also lowered her credit score. So for major purchases, she uses non-bank installment loans. She plans ahead and makes prudent decisions about borrowing. Daniela took out a $1,400 lo an to pay for her son's summer camp. She also borrowed to cover travel expenses to visit family abroad, and to help build a small house for her mother in Mexico. BORROWER STATS AVG. HO USEHOLD SDC PRODUCTS USED INCOME INSTALLMENT AUTO TITLE 51% 36% $46k % WITH SAVINGS PRIOR TO CRE DIT USE PRIMARY LOAN # LOANS USED LOAN USES IN A YEAR AMOUNTS 24 CAR PURCHASE 1 to 2 LOANS < $500 32% 51% 38% 71% FURNITURE/ APPLIANCE 3 to 5 $500 to $1,000 LOANS 17% 24% 53% BUSINESS 6 + LOANS > $1,000 13% 15% Small-dollar credit consumers deserve high-quality solutions that address their need for credit and help them improve their financial health. The challenge of how to responsibly extend small-dollar credit can be met, and it starts with knowing the needs of the borrower. To see the report, visit our website http://www.cfsinnovation.com/content/know-your-borrower-four-need-cases-small-dollar-credit-consumers CFSI Sponsored By: Center for Financial Services Innovation FORDFOUNDATION %24 %24