The Center for Financial Services Innovation (CFSI) released a new study that uncovers reasons why consumers use potentially harmful small-dollar credit products and highlights the need for better high-quality credit solutions. The study, supported by the Ford Foundation, surveyed over 1,100 small-dollar credit (SDC) consumers, plus an additional 500 non-SDC consumers for comparison. The findings suggest several important implications for financial services providers, policymakers, and others working to improve the quality of SDC products and to expand high-quality options and alternatives.
“Every year, millions of American consumers use small-dollar credit products for quick access to cash,” said lead author, Rob Levy, Manager, Innovation and Research at CFSI. “These products ” payday loans, pawn loans, direct deposit advance loans, auto title loans, and non-bank installment loans ” often come with high fees or interest rates and can lead consumers into a cycle of repeat usage and mounting debt. Our goal with this study was to see where the market is today, and encourage development of high-quality credit as defined by affordability, transparent marketing, a structure that supports repayment without creating a cycle of repeat borrowing, and offering the opportunity for credit-building.”
The study, which sought to understand why consumers use these products, how they choose among them, how they fare afterwards, and what they think about their experiences, delivered the following key findings:
An estimated 15 million consumers used at least one SDC product in the past year
59% of surveyed SDC consumers had only a high school education or less, compared to 45% of non-SDC consumers polled
Only 27% of SDC consumers had a credit card, compared to 61% of non-SDC consumers
The top three uses noted for an SDC product included: utility bills (36%), general living expenses (34%), and rent (18%)
The top three reasons identified for funds shortage included: living expenses consistently more than income, bill or payment due before paycheck, and unexpected events such as emergency expenses or income drops
While 66% of SDC consumers had no savings, more than half of those that did have savings chose not to use it all and relied on credit instead
When looking across the entire year, payday borrowers took out an average of 11 payday loans or extensions, remaining in debt for approximately 150 days out of the year; while pawn loan borrowers took out an average of 7 pawn loans, remaining in debt for approximately 200 days out of the year
30% of SDC consumers reported the loan costing more than expected, and 27% reported the loan taking more time than they expected to repay
CFSI’s research demonstrates the complexity and diversity of needs, choices, and experiences faced by SDC consumers. Implications of this study are far reaching and indicate consumers would benefit from a multitude of safe, affordable, high-quality credit products and tools designed to meet their needs.
For more information about the study or CFSI’s findings, go to http://cfsinnovation.com/content/complex-portrait-examination-small-dollar-credit-consumers. CFSI will be holding a public webinar on Wednesday, September 5, 2012. To register, please go to www.cfsinnovation.com.
The Center for Financial Services Innovation is the nation’s leading authority on financial services for underbanked consumers. Since 2004, its programs have focused on informing, connecting, and investing – gathering enhanced intelligence, brokering and supporting productive industry relationships, and fostering best-in-class products and strategies. CFSI works with leaders and innovators in the business, government and nonprofit sectors to transform the financial services landscape. For more on CFSI, go to www.cfsinnovation.com or follow us on twitter @cfsinnovation.