Hope for the Best: January Demand for Payday Loans Exceeded New Year’s Eve

Hope for the Best January Demand for Payday Loans Exceeded New Year's Eve

The number of microfinance organizations that issue payday loans in the USA is growing: in January 2022, an increase in demand was recorded not only to January last year, but also, which is unusual, by the New Year’s Eve. According to experts, the main reason for this trend is the tightening of borrower requirements set by banks. Demand could also be affected by the growth in consumer activity.

Americans took out 30% more payday loans than last January

The number of loans for bad credit in MA issued online in January 2022 compared to the same period last year increased by 31.6%, the volume of loans – by 27.2%, analysts of the online financial platform calculated.

It is also noteworthy that the first month of 2022 surpassed the indicators of December 2021 by 3%, although it is the pre-New Year period that is considered the most active in the microcredit market.

“The demand for online payday loans in January 2022 was higher than in December. This is unique to the microfinance market. As a rule, the “hot month” is December, when clients take short-term loans for gifts and make purchases for the holiday,” says Robert Ryans, CEO of one of the MFIs. “At the same time, January is traditionally a calm month.”

Experts believe that the current extraordinary growth in the number of payday loans is due to several factors at once. First, this year, due to the pandemic and border closures, many borrowers stayed at home and continued to live and spend as usual. Because of this, there was no traditional lull on the New Year holidays when the number of calls was significantly reduced. The second reason, according to experts, is that people are tired of the pandemic and savings. The year 2021 gave many borrowers hope for an improvement in the financial situation, and people began to more willingly use short-term borrowed funds, financial experts explain.

Since the beginning of the pandemic, the market has indeed recorded an increase in the growth of demand for payday loans (the number of applications processed). Experts draw attention to the fact that at the same time, starting in March 2021, most of the market participants began to tighten requirements for assessing the solvency of a potential borrower in order to prevent excessive debt load and a large number of default loans.

“The consequence of the steps taken was a decrease in the share of approvals by 10-20 percentage points. in the “peak months” (late May-mid-July). Since the third quarter of the year, companies began to test the easing of requirements, but at the moment the level of approval still remains significantly lower than the usual, pre-crisis values,” the expert says.

It is necessary to understand that MFIs, due to the specifics of their business, initially impose “softer” requirements on the client, so their clients are often those who have not been approved by banks but need funds. Experts add that during the crisis, MFIs have more clients, and the demand for such funds is increasing.

At the end of 2021, the number of consumer loans issued online increased by only 9.2% against 20.9% in 2020. Experts also cite data from Equifax, according to which, last year, banks approved only one in three applications for a loan.

An additional factor was the restructuring of the product line of MFIs – often organizations began to offer clients new ones on more attractive terms after successful loan repayment. The demand for MFIs could have increased against the background of a decrease in the general level of uncertainty in the economy and an improvement in the situation in the labor market.

Billy Snyder, a TransUnion employee, sees similar reasons. In his opinion, the growth in demand for borrowed funds may speak not only of the depletion of the airbag among some consumers of financial services but also, in general, of the restoration of the purchasing activity of Americans. So, in the fourth quarter, it grew in many segments, such as electronics and textiles.

“If in the first months of the pandemic many Americans adhered to the principles of total economy, now not everyone is following them,” the expert says. He believes that the current situation cannot be called problematic: the level of indebtedness of citizens and default on loans and borrowings remains at an acceptable level.

Now, there are no prerequisites for reducing the growth in demand for payday loans in the near future. As, however, there are no prerequisites for further mitigation of creditors’ requirements when assessing the solvency of potential borrowers. Experts believe that the restraining policy in terms of real extraditions should be continued in order to prevent a worsening of the situation, but this is not only about a simple approval or rejection, but, for example, approval for smaller loan amounts and longer periods, as well as the preservation of special anti-crisis services and products.