Why do people borrow?
Nov 02, 2013 Sean Albert
Over the past few months, there has been a lot of undeserved negative focus on the short term lending industry. This means of alternative finance has been brought through the ringer by government officials, consumer groups, media outlets and a number of other entities. That being said, people across the nation still continue to keep companies of this nature in business - so if supposed experts are against alternative lending, why are individuals ignoring their comments?
There's one simple answer - many of the detractors are wrong. It could be that some statements are being misinterpreted, these individuals don't understand the facts and statistics coming out of the sector, they have personal vendettas against short term lenders or a whole host of other possibilities. No matter the reason, negative claims have the potential to bring harm to the companies that operate within the sector, as well as the clients who need these financial options to keep their heads above water.
While of course there are bad apples in the realm to which some of the criticism could rightly apply, the fact of the matter is that the majority of the companies working in the sector are doing so legitimately, and these entities have brought relief and a lot of help to consumers across the United States for years.
One of the best examples of this occurred during the Great Recession. During these troubling times, because of regulations and the vast risk they faced, many traditional banks and other lenders couldn't afford to lend money to individuals with relatively low consumer credit scores. Unfortunately, though, these were the people who needed extra help the most. But this is where short term lenders excelled, because they didn't just judge people on traditional scores. They took it a step further, compiling more comprehensive financial portfolios using models like the Payment Reporting Builds Credit score.
But even now that the U.S. is on the road to total recovery, this sector is still essential to the fiscal health of a number of people across the nation. If taking advantage of the related services is such a poor choice, according to some government leaders, why do consumers continue to buy in? And despite popular sentiment, they're not largely driving themselves into unconscionable debt - borrowers are taking sums for a given, short amount of time, paying back what they owe and getting back onto sure footing.
Perhaps it would help the critics to find out some of the reasons why borrowing from small dollar lenders is still a thriving practice that is helping so many people in all corners of the U.S.
Coverage needed for unexpected expenses
The basic purpose of alternative credit is to allow individuals to contend with unexpected costs that crop up and cannot be covered by normal paychecks and even savings. For instance, even if an individual has steady income and a marginal amount of savings, he or she is likely going to have to pay part of the medical expenses out of pocket in the event that a freak accident occurs. Even with insurance, this can cost thousands of dollars the patient just doesn't have.
A report issued by the Pew Charitable Trusts revealed that 16 percent of first-time borrowers used alternative credit options to contend with surprise costs like medical bills or car repairs.
Another benefit of using short term lenders for these types of expenses is the fact that the majority of companies can get cash into the borrowers' bank accounts within a 24-to-48-hour period - a perk that cannot be claimed by almost any other source of financial help.
Regular bills need a boost too
According to the information from Pew, a number of consumers are using short term loans to cover expenses that should be foreseen every month, like normal rent, utilities and student loan bills. However, this is not what these types of loans are for.
The Pew report revealed that, of the individuals surveyed, 69 percent explained that the first time they took out a small dollar loan, they did so in order to pay off recurring expenses like credit cards, mortgage, food or other costs.
However, this might be a great opportunity for companies in the sector to reach out to consumers, explain the basic purpose of these loans and educate them on the ways to best handle their money. Going above and beyond by offering helpful services can drive interest in the industry.
Moreover, this indicates that the economy isn't as stable as initially thought, and federal and state regulators might consider relaxing a number of regulations on traditional and alternative lenders. Clearly, if consumers are using short term loans as a way to stay above water, something has to be done to help people have more access to cash. This might be more of a commentary on the traditional sector than anything else.