Middle-Income Consumers Demand Small-Dollar Loans

2016/09/30

Since we made small-dollar consumer loans available on our platform this past April, we have received hundreds of applications. Statistics of our user data indicate that middle-income consumers prefer small-dollar loans for managing short-term cash flow volatility because they are easy-to-manage and easy-to-control. 

1.    77% of applicants have verified annual income of above $30,000

The US Census Bureau reported a 2015 median personal income of $30,240 for all who worked. That puts most of our loan applicants in the middle-income wage earners’ group.

The diagram below shows the income distribution for the overall income generating population as well as the income distribution for our loan applicants. With 167million Americans holding at least one credit card, middle-income wage earners in general should have access to credit cards. However, to cover short-term liquidity need, many seem to prefer taking out an installment loan with fixed term to an open-ended credit line.

2.    95% applicants have a full-time job, and 85% of them are above 30 years old

Most of our applicants are mature both in age and in job history. Their median age is 38 and average work experience is above five years. Almost all are generating current income. Some even have multiple sources of income.

Individuals in this demographic group tend to be in the process of building a family or finishing advanced professional training. Financially, they likely are responsible for others in addition to themselves, which means not only is there more demand on their income but also there are more variables in their spending pattern. Both could lead to cash flow volatility.

3.    A wide range of use for loan proceeds, from emergency cash to paying bills

An analysis of the spending needs further confirms the above conclusion.  There is hardly a dominant purpose in the use of borrowed proceeds. In addition to covering unexpected (e.g. medical, legal, repairs) and expected large spending (education, moving, wedding, vacation, purchase), as many as 20% of the applicants are borrowing just to pay bills or rents.   

In a paper published in 2011 by the Brookings Institution, researchers found that “one-quarter of U.S. households surveyed report that they are certain they could not come up with $2,000 within 30 days, and an additional 19 percent of all respondents would cope at least in part by selling or pawning possessions or taking payday loans.” More recently, according to a survey by the Federal Reserve, “Forty-six percent of adults say they either could not cover an emergency expense costing $400”, and “40 percent of those who desired credit say that they faced a real or perceived difficulty in accessing credit.” 

Despite the strong demand for small-dollar consumer loans, high costs have kept many regulated financial institutions from offering this product. At Happy Mango, we strive to substantially reduce the high underwriting and on-going management costs through data technology so that lenders can afford to make affordable loans to their customers. What is your institution’s consumer lending strategy?  We would love to hear from you.

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