Consumer Lending

Report: Exceeding income borrowers among most credit-dependent consumers

LoanA recent report from the Center for Financial Services Innovation identified consumer needs in accessing small-dollar loans, revealing that borrowers who exceed their income are “among the most credit-dependent customers” and have the fewest options in the financial marketplace.

The report said exceeding income borrowers generally had the lowest income, least access to credit and most financial barriers. Only nine percent of exceeding income borrowers have savings, and they are most likely to rate their financial situation as “poor.”

Funded in part by the Ford Foundation, the CFSI compiled the report “to examine the needs, decisions and experiences of small-dollar credit consumers, with the goal of promoting the development of high-quality SDC solutions.”

Exceeding income borrowers are among the four types of borrowers identified in the study, including misaligned cash flow borrowers, unexpected expense borrowers and planned purchase borrowers.

Unexpected expense borrowers are those who access SDC infrequently for larger expenses related to unexpected or emergency events, such as hospitalization or car repair. Nearly 50 percent take out only one or two loans each year, and though they face constrained access to traditional credit, one-third of unexpected expense borrowers have savings at the time of the loan.

Misaligned cash flow borrowers take out smaller loan amounts to pay bills and household expenses when income and expenses are misaligned for a number of potential reasons, including variable income, financial management issues or low income. Such borrowers are among the most credit-dependent, with 42 percent taking out six or more loans per year.

Planned purchase borrowers account for the smallest percentage of all small-dollar credit users at nine percent. Such borrowers generally use installment loans to purchase a vehicle, complete a home repair, buy furniture or cover small business expenses. They are the least frequent borrowers but generally have the largest loan amounts. Nearly two-thirds of planned purchase borrowers have savings at the time of the loan.

“Many SDC consumers could benefit from financial management solutions and innovative approaches to help them better budget and save,” CFSI Research Analyst Nicholas Bianchi and Director of Research Rob Levy, the authors of the study, said. “Financial services that help consumers reduce cash flow shortages and help build emergency savings have great potential to address the underlying financial needs that drive many SDC consumers to use credit.”

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