Every year, an estimated 15 million people access small-dollar credit (SDC) products- like payday loans, pawn loans, auto title loans, deposit advance loans, and more. CFSI explores the reasons why consumers turn to these potentially high cost products in this latest report.
The study, supported by funding from the Ford Foundation, identifies 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:
- Unexpected Expense borrowers tend to access credit infrequently for relatively larger expenses related to an unexpected or emergency event, such as a car repair.
- 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.
- 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.
- 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. They 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.