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A new class of American consumers could benefit lenders

Jan 07, 2014 Walt Wojciechowski

Many short term lending operations and other financing outlets are wondering what the long term impact of the Great Recession will be on their enterprises. Concerns over borrowing habits have increased, as Americans have shown that they are more apt to save money rather than spend it.

Millionaire Corner recently cited a Gallup survey that found the American public is becoming more frugal. According to the source, 62 percent of Americans prefer to save what they earn. Just 33 percent favor spending their income.

This is a far cry from spending habits of past years in the United States, something that experts believe is a byproduct of the economic downturn. Financial hardships forced many Americans to reconsider how they use their money and many ultimately decided it's important to save funds for troubling times that may come about in the future.

This type of conservative spending behavior is usually met with disdain from lenders and retailers. Although this trend appears negative on the surface, it could actually be beneficial for loan providers.

Defaults could decline
A more financially responsible borrower is more likely to stay on top of payments than a consumer who does little to monitor their monetary output. Even if it means there are less loan applications that come in, lenders may actually be able to accept a higher percentage because the risk is reduced, as more borrowers are current on the debt payments. Moreover, it could allow banks and alternative lenders to extend credit to subprime borrowers, as they will have fewer defaults to contend with, giving financiers more ability to leverage these usually risky loans.

In fact, data from Biz2Credit showed that many lenders are indeed reporting higher application approval rates this year. According to the source, big banks approved 17.4 percent of loans during November. For the same month a year ago, just 13.2 percent of loan applications were successful. Also, year-to-year application approvals increased for community banks and alternative lenders last month, the latter of which includes short term outlets.

Although high spending levels are often associated with increased business for lenders, the current environment could be more beneficial than many believe it to be. As consumers start to more closely monitor their financial accounts, they are increasingly likely to make more informed monetary decisions. For this reason, lenders may see a decrease in late payments in the coming years, as long as Americans continue to watch what they spend.