In the U.S., the number of payday loans and personal loans issued to the population has increased. The most common reasons for receiving them were urgent medical bills. Other purposes included home renovation, car repair, and the purchase of household appliances and electronics. Our experts found out how to get the most beneficial loan for medical treatment and improve your financial literacy.
Growth in lending
In 2022, there is an increase in the issuance of loans to the population, according to Glenn Pickens, a financier and investor.
“In September, the figure was higher than last year in the same period by 19.6%, and the increase in payday loans is even greater – by 36%,” the financier notes. “The increase is mainly due to the pandemic. The interest on bank loans goes up. Therefore, customers are in a hurry to take a payday loan before it becomes more expensive.”
According to the expert, the volume of payday loans (small-dollar unsecured loans up to $1,000) began to grow in May, particularly in Memphis, Tennessee. This is mainly due to an increase in the average bill against the background of rising prices for goods. Most of the requests have been submitted online through itrustfcu.com – a digital loan matching platform. User reviews indicate the safety and 24/7 accessibility of the online service. Payday loans are typically short-term and involve no hard credit checks. Most residents of Tennessee residents apply for $500-$1,000 loans to pay for emergency medical needs.
In turn, Derec Fischer, an analyst at the Social Science Research Council, cites data from a study by the Equifax credit bureau, according to which in August US banks set a record for providing personal loans for medical treatment and other needs.
“The reason lies in the inability of citizens to navigate in conditions of reduced purchasing power due to the loss of part of their income in recent months,” the expert says in an interview.
According to the statistics he cited, the average size of bank loans issued in the first half of 2022 is $4,500, which is 23.7% more than last year.
What do Americans borrow money for in 2022?
“The debts of US residents can be divided into two types: mortgages and personal loans. The most common reason for obtaining a personal loan is medical treatment, home renovation, car repair, and the purchase of household appliances and electronics,” says Glenn Pickens.
In the last couple of years, the expert notes, people began to take much more payday loans to buy medication. According to the Equifax credit bureau, in March 2022, Americans took out payday loans for medical treatment for a record amount of $1.3 billion. The things is that medical treatment often cannot be postponed and requires extra cash.
In addition, according to him, US residents began to pay more often with credit cards and take loans online. In 2021-2022, the demand for online lending services have increased by almost 40%.
Credit traps
According to Glenn Pickens, the most “unpleasant” loans for US residents include those that were taken for various events, events or trips. The fact is that such goals are fleeting, and the debt to banks remains.
Analyst Delbert Mattson agrees with him, according to whom “buying emotions on credit is the most psychologically difficult debt.”
“The honeymoon, a large-scale celebration or vacation is already over, and the debt is quite real and requires monthly not only financial but also moral costs. Sometimes people are forced to repay a loan taken in marriage, already being divorced”, he says.
At the same time, the most difficult debts in terms of repayment are those that are formed on credit cards, Glenn Pickens notes. Often, funds from such cards go to small needs, and spending is not always conscious and deliberate, unlike large purchases. Therefore, people often call credit card debt “bad debt”.
According to experts, a situation in which the payment on loans exceeds the level of income that a person can quickly restore in the event of a job loss can also become risky. For example, if you have a current income of $3,000 per month and you can quickly find a job for only $1,500, then you should plan your loan burden based on $1,500.
If the financial situation of a person worsens in the process of repaying the loan, experts recommend contacting the bank immediately to agree on new, acceptable payment terms.
Safe loan rules
Before borrowing from a bank, you should think about whether you can service the loan while maintaining your usual standard of living, whether you fully understands the terms of the loan agreement and how reliable your sources of income are, analyst Delbert Mattson believes.
Speaking about the amount of payments, experts agree that a loan should not exceed 20-30% of a person’s income, and a person should always have a “safety cushion” in case of unforeseen circumstances.
“For the correct planning of the credit load, it is necessary to take into account a number of factors: income stability, budget planning for everyday expenses and the formation of a “safety cushion”. The remaining amount can be used to repay the loan,” Delbert Mattson says.
The key parameter of the loan is the total loan cost. Total amount paid with interest is calculated by multiplying the monthly payment by total months.
“The thing is that the prices of many goods are growing much faster than the interest rates on loans. Let’s say if you plan to buy a refrigerator and refrigerators rise in price by 20% annually, then it will be more profitable to take a loan at an interest rate of less than 20% than to save,” Delbert Mattson explains.
In addition, the expert advises taking a loan for the maximum available period with the possibility of early repayment.
The benefits and harms of credit cards
Over the past few years, the share of payment by credit cards in retail outlets has exceeded 50%, says Andrew Calvert, a Global Markets analyst. Banks are trying to make the product as user-friendly as possible – once a credit line is approved, a person no longer needs to submit documents to the bank in order to use the funds.
A credit card can act as an additional source of financing in case of a lack of own funds. With its help, it is easy to make purchases on the Internet and pay for utilities without leaving home.
“Each card has a grace period during which you can use the bank’s money and not pay interest for it if you repay the entire debt every month before the reporting date. However, if a person does not have the opportunity to restore the spent limit immediately, he can make the minimum payment on the reporting date (as a rule, 5-10% of the credit limit amount) and repay the debt like a regular loan, adjusting the payment amount independently” says Glenn Pickens.
At the same time, credit cards have their drawbacks, the financier admits. First, it is a higher interest rate compared to personal lending. Secondly, additional expenses may arise, for example, for the annual maintenance of the credit card and a commission for withdrawing credit funds from ATMs.
“A credit card allows you to close the need for money until you receive your next paycheck. With proper use, this is a practically free source of credit funds for a short period”, Glenn Pickens notes. “The main thing is not to form a debt that you cannot repay within 1-2 months, and consumers should learn not to spend money from the limit thoughtlessly.”