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TMCNet:  Why Consumers are Turning to Small-Dollar Credit

[December 04, 2013]

Why Consumers are Turning to Small-Dollar Credit

CHICAGO --(Business Wire)--

Today, the Center for Financial Services Innovation (CFSI) released a new study identifying the financial needs leading consumers to use potentially high-cost small-dollar credit (SDC) products-like payday loans, deposit advance loans, auto title loans, and more. With an estimated 15 million people accessing SDC products to address their need for quick access to cash, the report underscores the importance of developing high-quality credit products designed to help meet this demand without the risks posed by many of the credit products available today.

The study, supported by funding from the Ford Foundation, identified four primary consumer need cases in the SDC market, each representing a distinct borrower profile and different uses of small-dollar credit. The need cases are:

  1. Unexpected Expense borowers tend to access credit infrequently for relatively larger expenses related to an unexpected or emergency event, such as a car repair.
  2. Misaligned Cash Flow borrowers take out smaller amounts somewhat frequently to pay bills and meet regular household expenses when their income and expenses are mistimed.
  3. Exceeding Income borrowers' expenses regularly exceed their income and these consumers tend to be among the most frequent users of credit, accessing small amounts for everyday expenses.
  4. Planned Purchase borrowers are a smaller but important niche group of users in the SDC market who make a relatively large, planned purchase, commonly related to a personal asset.

These need cases were determined through analysis of a panel survey of more than 1,100 SDC borrowers and 31 in-depth interviews with SDC customers. The report breaks down each need case by approximate market size, mean household income, average loan size, specific loan products used, and average number of loans per borrower.

The need cases presented here provide a new framework for exploring the challenge of when and how to responsibly extend small-dollar credit. The findings also suggest potential opportunities for the development of high-quality products, highlighting the importance of product differentiation and underwriting.

"This report provides a clearer picture of the needs, decisions, and experiences of small-dollar credit consumers," said Rachel Schneider, Senior Vice President, Insights & Analytics, CFSI. "There is no one-size-fits-all answer to the financial challenges facing millions of Americans, but we believe this report can inform the development of safe, affordable, and innovative solutions."

For more information and to download our report, visit here.

About CFSI:

The Center for Financial Services Innovation (CFSI) is the nation's leading authority on financial services for underserved consumers. Through insights gained by producing original research; promoting cross-sector collaboration; advising organizations and companies by offering specialized consulting services; shaping public policy; and investing in nonprofit organizations and start-ups, CFSI delivers a deeply interconnected suite of services benefiting underserved consumers. Since 2004, CFSI has worked with leaders and innovators in the business, government and nonprofit sectors to transform the financial services landscape. For more on CFSI, go to and join the conversation on Twitter (News - Alert) at @CFSInnovation.

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