Experts believe that it is worth taking a loan in two cases. Firstly, if life and health (of one’s own or loved ones) depend on it. For example, you urgently need expensive alcohol dependence treatment. Secondly, for any global purchase, such as an apartment. But only if the market is conducive to this and the purchase is not spontaneous but long-planned. In other cases, you can either wait and save up, or moderate your “Wishlist”.
Consumer lending has long been an integral part of the lives of millions of Americans. Unfortunately, until now, many borrowers are poorly aware of the rights and obligations that appear when concluding a loan agreement.
But a loan is not only rights and obligations. It is important to carefully approach the choice of a loan, to be able to compare it with other products, to find the pros and cons. Borrowers must be able to correctly assess their financial burden, not to take on more obligations than they are able to fulfill.
We advise you not to apply for a loan unless it is absolutely necessary.
2022 study: Americans take loans for treating alcoholism more often
Medical treatment and repairs are the most popular purposes for which Americans took out Delaware payday loans online last year. A payday loan is a short-term loan that can help you deal with unexpected cash needs until you get your next paycheck. These are small loans, typically $500-$1,000. Payday loans are usually meant to be paid off in one lump-sum payment. Their popularity is growing in 2022 as the application process can be completed online and involves no paperwork.
The share of loans for vacations and buying gifts has decreased significantly, while loans for medical treatment, including treatment of alcohol dependence, and education have become twice as frequent. US banks and microfinance organizations note that their clients have become more disciplined.
Loans for medical treatment and education grew the fastest in 2021 in relative terms, according to financial experts. The share of payday loans that clients took out to solve health problems increased from 5.6 percent to 10 percent compared to 2020. The share of loans for education increased from 2 to 3.8 percent.
The most popular purposes of loans in 2021 were personal needs (39.5 percent), home renovation (15.3 percent) and large purchases (household appliances, electronics, etc. – 12.3 percent). The share of loans for leisure and vacations has decreased significantly – from 4.3 percent in 2020 to 2.2 percent in 2021. Americans also became less likely to take loans for gifts (5.6 percent in 2021 versus 6.4 percent in 2020) and for refinancing bank loans and other loans (0.9 percent in 2021 versus 2.5 percent in 2020).
According to US banks, in the third quarter of 2021, the payday loan portfolio grew by 6 percent compared to the second quarter. The number of borrowers under existing loan agreements almost returned to the levels of the beginning of the year. The average loan size in the segment of payday loans increased from $700 to $1,000, in the segment of medium-term personal loans – from $2000 to $4000.
The regulator draws attention to the decrease in the share of overdue debts in the total portfolio of microfinance institutions. At the end of the quarter, it decreased to 30.7 percent (for loans overdue by 90 days or more).
Improvement in the quality of borrowers is also noted by market participants. According to Experian, in November 2021, the average personal credit score of an MFI borrower was 716 points – 6 points higher than in November 2020. The maximum increase in the score is observed for borrowers with loans exceeding $1,000.
According to marketing experts, microfinance institutions improve the quality of risk management, which leads to an improvement in the quality of the client base. Also, many MFIs encourage borrowers with a high personal credit score and offer them the best loan terms.
Many large MFIs already in mid-2021 noted that the quality of clients is growing. In general, the level of financial literacy and the financial discipline of clients is growing. In addition, we have recently observed a change in the client base of MFIs: there are more young borrowers (up to 30-35 years old), there is a small influx of “classic” banking clients into the sector.
Tips for potential borrowers in 2022
If you have to borrow money, approach this wisely and follow a number of rules.
- Decide how much of your income you can give to the lender. It is desirable that it does not exceed 30-40% of monthly income after all necessary payments. If you have dependent children and other relatives, do not forget to take into account the expenses for them;
- When choosing a loan, find out what conditions are offered by a payroll bank or a bank with which you have already had a relationship. Usually, credit organizations offer more favorable rates for “their” clients. If this option does not fit, pay attention to the offers of other lenders;
- Use online referral services. They are the most convenient way to find a profitable loan. It is enough to specify the necessary parameters (amount, term, collateral, etc.), and the service will select the appropriate products. Pay attention not only to the interest rate but also to related costs (origination fees, early repayment fees, etc.);
- Pay attention to how comfortable it will be for you to cooperate with a particular bank. For example, it is usually important that a credit institution has an understandable, convenient and functional Internet bank and preferably a convenient location and 24/7 operation schedule;
- Always read the documents that you sign. If you are in a hurry at the bank branch, take the papers home and study them in a calm atmosphere. Remember that you agree with everything that is written on it by putting your signature on the sheet. Then no one will listen to your excuses like “I didn’t know”, “they didn’t tell me”. After all, you put your signature under the line “I have read the contract and agree to all the terms and conditions”;
- Feel free to ask questions to the bank employee. It is better to clarify all the nuances before signing the loan agreement. Do not forget that a loan is a voluntary matter. If the contract contains conditions with which you strongly disagree, refuse it and try your luck at another bank;
- Make your payment early. Today, any bank or MFI will offer you several repayment methods, at least one of them should be free. Do not forget that the bank may not process transactions on weekends and holidays, so if the due date is a non-working day, make the payment in advance;
- Form a “safety cushion” equal to three or four monthly payments. Set aside this emergency supply in a separate account (or in a separate envelope) and use it only as a last resort, for example, in the event of a job loss or illness;
- Try to make early repayments more often. Interest is calculated monthly on the balance of the debt, and the faster you reduce the amount of the principal debt, the lower the final overpayment on the loan will be;
- Be aware of the terms you have agreed to. If the agreement provides for confirmation of the intended use of the loan or annual insurance, do not forget to submit the relevant documents to the bank. Observe the deadlines. Otherwise, a significant fine or an increase in the interest rate may follow;
- Loan refinancing programs have become extremely popular recently. They allow you to reduce the APR, increase the term or combine several loans into one. To find out how profitable refinancing will be for you, calculate the cost of a new loan (do not forget about insurance, commissions and other expenses) and compare this amount with the costs that you will incur if you leave everything as it is. If the difference is significant, you can safely go to the bank for refinancing;
- If it’s time to close the loan, we recommend contacting a bank employee. This can be done over the phone or in the office. Check with the specialist the amount of the final payment – it may differ from the monthly one;
- As soon as you repay your loan, take a zero debt certificate. It can be useful if the bank incorrectly reflects information in the credit bureau or in other cases in case of disagreements with the bank. If you use Internet banking, then we also recommend checking the status of the loan there;
- If you issued a plastic card for servicing a loan, do not forget to close it too. Card tariffs may include annual maintenance or a fee for SMS informing.