Personal needs and repairs are the most popular purposes for which Americans took CT payday loans last year. Payday loans are short-term loans for small amounts of money. They are often structured to be paid off in one lump-sum payment. The share of loans for recreation and the purchase of gifts has dropped significantly, while loans for medical treatment and education have been borrowed twice as often. Bank of America notes that clients of microfinance organizations have become more disciplined.
Loans for medical treatment and education grew the fastest in 2020 in relative terms, financial experts calculated. The share of payday loans that clients took to solve health problems increased compared to 2019 from 5.6% to 10%. The share of loans for education increased from 2% to 3.8%.
– On the one hand, health problems worsened, and most of the people were forced to spend money on paying for medical services and medicines. On the other hand, the transition to distance education has led to a great demand for tutoring services, – Ruben Richardson, a financial expert, explained the market dynamics. – Also, people freed up additional time due to the self-isolation regime and the transition to remote work, and many of them preferred to spend it on self-development. The growth of loans for training is associated with this.
What are the reasons that people get a loan?
The most popular purposes of payday loans in 2020 were personal needs (39.5%), home renovation (15.3%) and large purchases (household appliances, electronics, other – 12.3%). The share of payday loans for vacations has significantly decreased – from 4.3% in 2019 to 2.2% in 2020. Americans also began to borrow less often for gifts (5.6% in 2020 versus 6.4% in 2019) and for refinancing loans from banks and other loans (0.9% in 2020 versus 2.5% in 2019).
According to the Bank of America, in the third quarter of 2020, the payday loan portfolio grew by 6% compared to the second quarter. The number of borrowers under the current payday loan agreements has practically returned to the levels of the beginning of the year and amounted to 11.8 million. The average loan size in the payday loans segment increased from 7.5% to 7.9%, in the segment of medium-term payday loans – from 15.2% to 17.7%.
The regulator draws attention to the decrease in the share of overdue debt in the total portfolio of microfinance institutions (MFIs). At the end of the quarter, it decreased to 30.7% (for loans overdue by 90 days or more). The main factor in improving the quality of the portfolio in the Bank of America is the strengthening of the risk policies of MFIs during the first wave of the pandemic, which contributed to the issuance of loans to more reliable borrowers, as well as improved payment discipline against the backdrop of growing economic activity.
The improvement in the quality of borrowers is also noted by market participants. According to Equifax, in November 2020, the average personal credit rating of an MFI borrower was 501 points – 6 points higher than in November 2019. The maximum increase in the rating is observed among borrowers with loans exceeding $700 (by 41 points – from 530 to 571 points).
According to Donald Williamson, an Equifax manager, microfinance institutions improve the quality of risk management, which leads, among other things, to an improvement in the quality of the client base. Also, many MFIs reward borrowers with a high personal credit score and offer them the best credit conditions.
“Many large MFIs already in mid-2020 noted that the quality of clients was growing,” said Edmond York, a financial advisor. – In general, the level of financial literacy and, more importantly, the financial discipline of clients is growing. In addition, recently we have seen a change in the client base of MFIs: there are more young borrowers (up to 30-35 years old), there is a small influx of “classic” banking clients into the sector.