Young People Are Payday Lenders’ Newest Prey

According to data for 2021, the debt of Americans on payday loans increased by 10% and reached 188 billion. The volume of short-term loans fell by almost 10%, and medium-term loans increased by about 5%. Along with the change in the structure of debts, the portrait of the borrower also changes. Young people become a great rate of payday lending services.

And there are reasons for this:

• the incomes of young people are not as significant and stable as those of middle-aged people;
• young people do not have their own housing and other important objects for life;
• among young people, the prestige of owning fashionable gadgets is very high;
• young people are less adapted to crisis situations;
• young people have practically no savings;
• banks often refuse loans to young people due to lack of credit history or because of low incomes;
• it is becoming easier to take out loans online, which is quite suitable for young people who practically “live” on the Internet.

Changed portrait of a payday lender’s client

Americans under the age of 25 began to take out unsecured payday loans more often in 2020. Analysts saw an alarming signal in this phenomenon — a high unemployment rate can condemn many people to credit bondage. In addition, debtors risk “hanging” obligations on parents. The demand for payday lenders is explained by their greater loyalty to young customers than is customary with banks. In addition, they may not have a credit history, which reduces the chances of getting loans in the usual way.

The share of borrowers under the age of 25 reached 35% in August 2021. Sharp changes began in April, when the indicators immediately increased by 0.6 percentage points, to 38%. In addition, the share of young Americans using a credit line has also increased significantly — by 2.5 percentage points, up to 20.6%, compared to August 2019.

Annually, the share of young people taking out payday loans is growing, and the share of people over 40 is falling. Elderly people, over 50 years old, have practically stopped issuing small loans. If a couple of years ago it was possible to talk about the dominance of 30-year-old customers, now 20-year-olds are leading, that is, customers younger than 30 years old. They already make up more than a third of all borrowers. For the most part, they take out short-term loans for amounts in the range of $1,000.

About a third are clients aged 30-39. The average income of borrowers ranges from $1,000-$2,000. With the onset of the crisis, the number of “payday” loans has increased. Half of borrowers apply to MFIs because of salary delays. Men and women apply with almost the same frequency – the proportion of men barely exceeds the proportion of women by 5%.

At first, many online lenders were afraid of the growth of young clients without a credit history, as they considered such loans quite risky, and young people were not solvent due to difficulties with employment and low salaries. However, it turned out:

• they go to the lender for a good credit history;
• young people are more financially literate;
• it is easier to communicate with such a service, since they are open to all communication channels;
• they know how to plan the budget;
• they demonstrate a high level of financial discipline;
• if it is impossible to pay, it quickly restructures the debt.

Why do clients still apply for payday online loans?

Clients under 25 years old issue payday loans, most often, because of financial difficulties, when banks refuse a loan. In this case , one of the circumstances can be assumed:

• the borrower does not receive an official salary;
• his credit history is ruined.

According to statistics, over 30% of employees are employed informally in the United States. They cannot submit a certificate of income to the bank, and therefore cannot become clients of the bank.

According to the credit bureau, 23% of borrowers have a low credit rating: they have a spoiled credit history or none at all. That’s the paradox: if a person has lived without debt all his life, he has a low credit rating, since there is no credit history. The bank does not favor such people, when the online lenders accepts them with almost 90% of approval.

Some people specifically take out a loan from a microfinance organization so that they have a good credit rating or a spoiled one increases. But this does not always work: banks do not really recognize the rating earned when repaying payday loans.

If earlier the majority of borrowers took out cash advance for current needs, now the range of loan assignments has expanded significantly. They repair cars, go on vacation, pay for treatment and expensive cosmetic procedures, buy very expensive goods for which there is not enough money. Many online lenders cooperate with expensive equipment stores and offer their services there. As a result, the flow of young borrowers buying expensive fashionable gadgets on loan has increased.