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Lenders should prepare for dip in consumer finances

Feb 19, 2013 Sean Albert

During the past few years, many Americans were affected by layoffs, increased taxes and other expenses and pay cuts made because of the Great Recession. As such, numerous people found themselves in dire straits, struggling to pay bills and consulting with lenders to find relief between paychecks.

Though the economy has recovered somewhat from the situation that started in 2008, some economic experts think the recent "fiscal cliff" debates and resulting regulations could have a long-lasting effect on consumer finances. While going over the cliff was temporarily avoided, Congress had to increase taxes somewhere to supplant government funds. Many individuals may have noticed pay cuts on the first few checks of 2013 but due to the expiration of a Social Security payroll tax cut, and though the amount is somewhat small, this loss in income will add up for some.

So, industry veterans think that consumers are going to be facing a hard time paying bills in the coming months. While this might initially mean renewed interest in taking out loans, it could also indicate that once they've borrowed, individuals might have a hard time making repayments. What should lenders do to maximize their return without putting their organization at risk for failure?

Economic troubles ahead
It is not only the expiration of a previous tax cut that is affecting consumers, but also slow job growth and rising debt across many sectors, from student loans to credit card balances. The source noted that the American Bankers Association released a statement in early January warning organizations that consumers might face a cash flow problem in the near future and have trouble paying off amounts borrowed.

"Changes in payroll withholding will decrease disposable income, reducing retail sales and making it more difficult for some people to meet their financial obligations," ABA chief economist James Chessen noted in the statement, explaining that consumers may go back to their fiscally conservative practices honed during the recession.

Look to alternative evidence
One of the best ways lenders may be able to prepare for an influx in loan applications without taking on a great amount of risk is by reviewing individuals' payment practices during the past few years. While traditional credit histories might be a good place to start, to get a more comprehensive picture of a consumer's financial habits, company leaders should look to an applicant's Payment Reporting Builds Credit score.

This shows the potential borrower's history of paying off utilities accounts, which can often yield a better score, and be used to weed out the would-be clients that likely have no intent to pay back a lender.