Americans Have Singlehandedly Revived The Online Installment Loans Industry. Are They Replacing Their Addiction To Credit Cards With A New Wave Of Credit?
Recently released data by credit reporting agency Experian showed a new trend in the debt composition of American households. They are switching out the credit card debt for personal loans. As of 2019, there were 38.4 million personal loan accounts in existence and the average consumer has a balance of $16, 259 in personal loans to their name. However, loans are no longer what they used to be and contrary to what you may think, the traditional idea of a personal loan is not behind the sudden shift. Instead, it is the online installment loan industry that Americans seem to have revived in the last 5 years. With personal loans growing at a staggering rate of 11 percent since 2018, one must wonder what is spurring the change in preference and of course, what the ramifications are to Americans switching out one kind of debt for another.
The History Of Online Installment Loans
For those that are not familiar with online installment loans, installment loans date back all the way to the 1850’s. However, it was not until much later that the digital aspect entered the picture. For borrowers, the appeal stems from the relaxed acceptance criteria. For the lower-income brackets or proportion of households that are living with poor credit scores or present as elevated credit risk, the online installment loan can seemingly present a much-needed avenue to access credit. Given the increased roadblocks these households may face in securing traditional credit including extortionate interest rates and heightened credit card denials, the online installment loan industry has been seen as a custom made solution to an existing need. Fast forward to today and U.S consumers have more than $150 billion in installment loan debt and have exhibited a growth of 63 percent, driven by those consumers with less than stellar credit histories or extended debt levels needing to access funds sooner rather than later.
Can We Blame The Fintech Revolution?
In TransUnion’s Industry Insight Report For Q4 2018, unsecured personal loans jumped by $21 billion. The highest source of unsecured personal loans? Fintechs. Fintechs account for 38 percent of all unsecured personal loan balances, surpassing credit unions and even banks. That is an incredible 35 percent increase from a year earlier. Meanwhile, the banks’ share has contracted to 28 percent while credit unions have seen a 10 percent decrease. This clearly illustrates a shift in consumer patterns when it comes to their credit institutions.
Thanks to the innovation and data analyzation tools now available to lenders in the credit industry, companies are able to better target customers with personalized credit offers. This is turning out to be a double-edged sword for American consumers. With more fintech lenders on the market, consumers are spoilt for choice when it comes to their debt options and what was once considered a last resort is now easily accessible to everyone, even those within the pits of debt despair already. It is now easier than ever to secure loans and armed with consumer data, Fintechs are using online installment loans as a selling point to soothe the anxieties Americans have about their repayment abilities. Hidden behind the guise of a longer repayment term, online installment loans look like the answer to buying yourself more time to repay outstanding creditors. The problem is, it comes with triple-digit costs and consumers only find themselves with increased debt repayments at the end of it all.
Auto Title Loans As An Alternative to Credit Cards
When fast cash is required the need to swipe the credit card is starting to decline. More people are turning to auto title loans as an alternative to racking up their credit cards. This type of short term loan could be a better solution for you than drowning in credit card debt for years. With a qualifying vehicle and no liens on your title the money could be in your hands as soon as the same day. Your credit won’t affect your ability to get approved either.
Financial Education Continues To Impact Our Choices
However, not all of the blame lies with the increased access and shift in the market that fintech has brought with it. Much of it resonates with the lack of financial education, guidance, and literacy that continues to exist amongst the American economy. Many Americans continue to be woefully unaware of how to manage their money so much so that most of us are simply one emergency away from a $0 bank balance. Around 25 percent have nothing saved for retirement and an even higher percentage have savings less than $1,000. However, what is interesting here is that 60 percent of consumers are uneducated about borrowing. This hits right at the crux of America’s debt problem with credit cards, online installment, and even payday loans. Understanding the workings of borrowing money and the financial skills needed to properly assess whether your household can afford to take on the debt(and its accompanying interest rates) can open the eyes of many American households. There is also the issue of taking on more debt than you can handle and failure to look beyond the glossy terms of new credit options and the results of this can potentially be catastrophic.
Consumers Are Coming To The Table With A Baggage Of Unpaid Debt Already
The average household income for those households with a high school diploma has only risen by 15 percent in the last decade. This falls short of the 20 percent increase in the goods basket, according to Bloomberg’s report. However, the shortage of income has not stopped there. College tuition and costs are up by 45 percent and expectedly, student loans are now at record highs. Americans are also being outpaced in the housing market and as a coping mechanism, they are taking on more debt. In fact, more of us are taking our mortgages into our retirement years and the mortgage market is in its peak thanks to weakened affordability and an impending housing price spike.
Then there is the credit card debt. Although consumers are switching to online installment loans, they still have built up credit card debt to their name. In fact, the average American has $5,331 in credit card debt in 2019, according to CreditDonkey.com. Given that interest rates hover around 19 percent for new cardholders and 15 percent for existing ones, households are already bearing the burden of high finance charges without adding similar finance charges to their monthly expenses. Around 45 percent of households do not pay their credit card balances in full each month which means we are constantly carrying debt. Keep in mind the average American has about 3 credit cards so those finance charges are most likely doubled or tripled in each household. In a time where the split between the cost of living and income is growing larger by the day, household budgets are already strained and it is time we begin looking at alternatives to high-cost borrowing.
If we must borrow, being educated about what to look for and how to judge the suitability of a credit source must be learned. There are other forms of borrowing out there that do not carry the high cost that online installment loans do. One good example is home equity loans. The markets are seeing historically low-interest rates which means mortgage rates have dropped and so has the cost of borrowing on your home. In November, home equity loans averaged 5.77 percent according to Bankrate.com and the length of the repayment terms come quite close to those of installment loans.
Longer Repayment Terms And Lowered Interest Rates Driving False Confidence Amongst Consumers
The premise behind online installment loans is that it essentially combines the terms of a payday loan and traditional loans. Loans are taken for a short term need but they come with high fees and interest rates to compensate for its targeting towards the credit challenged demographic. The difference is that consumers are allowed to repay their loans over several months instead of a few preset installments. While interest rates are admittedly lower than those charged by payday loan companies, households are still vulnerable to recycling their loans and interest rates over 100 percent depending on their credit rating and risk profile. It is exactly this caveat that online installment lenders are capitalizing on; heightened risks and depleted options are boxing in consumers into a very expensive corner.
In a time where financial regulation has kicked into high gear to help families across America find themselves out of a never endless debt tunnel, online installment loans have managed to lure consumers back in using the illusions of having more control over their finances; something Americans have desperately craved. However, while this hot new form of consumer finance may have temporarily replaced credit cards, it is not by choice. Not to mention credit card debt is still there- it hasn’t vanished. So now, not only do households have to contend with repercussions of their mounting credit card debt, they must now face the surging balances of their personal loan accounts.
The Best Car Title Loans in Los Angeles
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