Low-income households are moving away from payday loans
WASHINGTON—Online installment loans and small business loans are rapidly replacing payday loans as sources of credit for low-income households, due to regulatory changes and fintech innovations, according to a new study.
Overall, in 2018, these consumers in the United States spent $189 billion in fees and interest on financial products, ranging from pawnbrokers to subprime auto loans, up 4% from 2017, according to Financial Health Network, a student research group consumers underserved by banks and other traditional financial service providers. This figure is expected to increase by 4.2% to reach $196 billion in 2019, the group said.
Market expansion was fueled by robust growth in credit products such as installment loans and non-bank small business loans, as well as longer-term credits such as subprime auto loans and student loans. private, the group said. Some of these areas have seen technology-focused companies roll out various products in recent years, using digitized customer data to reach borrowers previously ignored by banks.
The rate of expansion of the underserved financial market is faster than the annual rate of inflation, which the Bureau of Labor Statistics said was 2.1% in the 12 months ending November.
“Despite a healthy economy by traditional measures, underserved consumers still have a significant need for credit,” said Jennifer Tescher, chief executive of Financial Health Network. “And it’s not credit to buy assets. It’s a credit to pay the bills and live their life every day. The group is funded by various non-profit organizations and financial companies, including the Ford and Gates foundations, AARP, Citigroup Inc.
and JPMorgan Chase & Co.
A large portion of the US population falls under the Financial Health Network’s definition of financially underserved consumers. They include 66 million people with low or middle incomes and 51 million consumers with volatile incomes. Also included are some 91 million people with subprime credit scores below 600 or poor credit histories, as well as 63 million people who have no or only limited access to banking services. Many of those in these groups overlap. The group analyzed the fees and interest paid on 29 products aimed at these consumers, based on industry and analyst data.
Some of these products are experiencing double-digit growth. For example, underserved consumers spent $9.8 billion on interest and fees on installment loans in 2018, after increasing at a compound annual rate of 13.8% between 2015 and 2018. private totaled $9.5 billion last year, after growing at a compound annual rate. rate of 16.8%, while spending on subprime auto loans totaled $29.6 billion last year, with a compound annual growth rate of 6.4%.
In contrast, spending on storefront payday loans — a product long popular with low-income consumers — declined at a compound annual rate of 16.2% between 2015 and 2018, reaching $2.1 billion a year. latest.
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Many lenders have switched to longer-term installment loans instead of one-time payment payday loans in recent years. The Consumer Financial Protection Bureau has been working on new regulations to curb these products, which often carry interest rates in excess of 300%. While the Trump administration has yet to implement the new rule, several states have passed new legislation to limit such loans.
Ms Tescher describes the credit market for the underserved as a “balloon”, in which you press one end and the other end pops out. “Credit never goes away,” she said. “It just takes a different form.”
Write to Yuka Hayashi at [email protected]
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