Findings from the Field: Consumers and Small Dollar Credit• Used payday loan, pawn loan, deposit...
Transcript of Findings from the Field: Consumers and Small Dollar Credit• Used payday loan, pawn loan, deposit...
© 2012 Center for Financial Services Innovation
© 2012 Center for Financial Services Innovation
Findings from the Field: Consumers and Small Dollar Credit
Rob Levy - Manager, Innovation and Research, CFSI Josh Sledge - Analyst, Innovation and Research, CFSI
Rourke O’Brien - Researcher, Princeton University Center for Financial Services Innovation
Underbanked Financial Services Forum June 13, 2012
© 2012 Center for Financial Services Innovation
In the consumer’s own words… “I have a hard time adjusting to the fact that everyday expenses - food, gas, utilities, meds, everything has gone up; and yet my salary stays the same; an hourly rate that has not changed in two years.”
"Due to [the] loan repayment terms, I was forced to continually take out another loan just to meet my basic needs. It was almost like modern day sharecropping in the form of a loan. I wish I had never taken the first loan.”
“My loan experience was a good one. The people were very nice to deal with and the process was quick and easy.”
“These people gave me a chance when no one else would help me out, and I did not disappoint them. I paid every penny back on time as scheduled.”
“Do not ever get a payday loan if you can help it. They are full of traps and crap.”
© 2012 Center for Financial Services Innovation
An Examination of Small-Dollar Credit Consumers
Background • Funded by the Ford Foundation • Two-Part Study
• Quantitative Survey >> Big picture understanding, data analysis (July 2012) • Qualitative Study >> Consumer voice, product-specific focus (Q4)
• Key research areas of focus • Demographics and financial state • Consumer need • Purchase decision process • Experience
Methodology for the Quantitative Study
• Fully-representative Knowledge Networks online panel • Adults (18+) with less than $75,000 in household income • 1,100+ consumers of SDC receive full survey
• Used payday loan, pawn loan, deposit advance, non-bank installment loan, or auto title loan in past 12 months
• 500 consumers of “mainstream” credit answer 3 questions for comparison • Used credit card, personal loan, friend/family, etc. WITHOUT using SDC
product in past 12 months
© 2012 Center for Financial Services Innovation
Who are SDC consumers?
© 2012 Center for Financial Services Innovation
Who are SDC consumers?
43%
38%
20%
26%
40%
34%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
$0k - $25k $25k - $50k $50k - $75k
% o
f Seg
men
t Pop
ulat
ion
SDC Consumers
Non-SDC Consumers
Distribution of Income for SDC and Non-SDC Consumers
© 2012 Center for Financial Services Innovation
What is the credit used for?
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
For home repairs
To pay back another loan
To help out friend/family
Car Related (Purchase or repair)
To pay rent
For my general living expenses(e.g. food, clothing)
To pay utility bills
% of Segment Population
Very Short-Term
Short-Term
All SDC Users
© 2012 Center for Financial Services Innovation
Why was there a funds shortage?
0% 5% 10% 15% 20% 25% 30% 35% 40%
I planned to make a major purchase thatexceeded my monthly income or savings
(e.g., car or truck, major appliance)
I spent most of my money that monthpaying off a previous loan
I had an unexpected drop in my income(e.g., lost job, hours cut, benefits cut)
My general living expenses areconsistently more than my income
I had an unexpected expense (e.g.,medical emergency, car broke down)
I had a bill or payment due before mypaycheck arrived
% of Segment Population
Very Short-Term
Short-Term
All SDC Users
© 2012 Center for Financial Services Innovation
Additional steps taken to cover credit need
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Also used another loan product
Worked more hours/Earn moreincome
Deferred or skip paying bills
Went without certain basic needs
Reduced general spending
% of Segment Population
Very Short-Term
Short-Term
Any SDC User
© 2012 Center for Financial Services Innovation
Usage of savings to cover credit need
Had No Savings, 66%
Had Savings, but Chose Not to Use
Any, 7%
Used Some, but Not All
Savings, 12%
Used all Savings, but Still Short,
16%
© 2012 Center for Financial Services Innovation
What loan attributes matter most?
Average Rating (Scale of 1-5)
Loan Attributes All SDC
Consumers Very Short-
Term Short- Term
How quickly I can get the money 4.4 4.4 4.4
I Can Qualify for this loan 4.4 4.4 4.5
Clear Terms/Knowing exactly what I'll pay 4.3 4.3 4.4
Amount I Can Borrow 4.2 4.2 4.3
Term or Length of Loan 4.1 4.0 4.2
Easy to do/few forms 4.0 4.0 4.0
Ability to pay back over multiple payments 3.9 3.7 4.3
Fees 3.9 3.8 4.1
Feel comfortable/Staff is Friendly 3.9 3.9 3.9
Store location convenient 3.8 3.8 3.8
© 2012 Center for Financial Services Innovation
Why not use other credit options?
Credit Card Overdraft Loans from Friends and Family
I don't qualify (32%)
Too expensive (25%)
I did - in addition to SDC (21%)
I maxed out or can no longer use this product
(19%)
Too inconvenient (17%)
Too inconvenient (20%)
Too expensive (16%) I don't qualify (15%) Not offered near me (17%)
© 2012 Center for Financial Services Innovation
How do Very Short-Term Credit Consumers Fare?
Yes, 62% No, 38%
Did you pay off your first loan on time?
Average # of rollovers: 5.1
Payday
Yes, 55% No, 45%
Did you pay off your first loan on time?
Pawn
Average # of extensions: 2.4
Did you pay the first loan w/o overdrawing your
checking account?
Deposit Advance
Yes, 85%
No, 15%
Participants reporting taking out another advance in the next month: 35%
© 2012 Center for Financial Services Innovation
How do Short-Term Credit Consumers Fare?
Yes, 76%
No, 24%
Did you pay off the loan by the end of the original term?
Average number of refinances: 2.9
Installment Loans
Did you pay off the loan by the end of the original term?
Average number of refinances: 3.0
Auto Title Loans
Yes, 71%
No, 29%
© 2012 Center for Financial Services Innovation
Why are so many consumers repeat users?
Regression Analysis: What factors contribute to rollover
or repeat usage?
Rourke O’Brien – Researcher, Princeton University
© 2012 Center for Financial Services Innovation
Regression Analysis…
• What it gets us: – Allow us to test for an association between two
variables “controlling” for other factors – Allows us to test for whether an observed difference
between groups is “statistically significant”
• What it doesn’t get us: – “Proof” or “Causality” that X leads to Y – “Statistically Significant” ≠ “Substantively Significant”
© 2012 Center for Financial Services Innovation
What predicts payday rollover?
• Outcome: Number of payday roll overs
• Primary Predictor: Loan to Income Ratio
• Key Controls in the models: -Income -Race -Age -Education -Marital Status -Urban Status -Whether first time user -Household Size -Sex
© 2012 Center for Financial Services Innovation
OLS Regression Predicting Number of Payday Rollovers (1) VARIABLES howmanyrollover paydaybyincome 1.271e+06* (7.148e+06) urban 0.466 (0.239) loghhinc 1.319 (0.443) firsttime 0.583 (0.224) black 0.693 (0.280) hispanic 0.642 (0.346) other 0.547 (0.379) Age 0.993 (0.0104) married 0.858 (0.292) widowed 1.400 (1.012) cohab 2.404 (1.770) divorcedorsep 1.366 (0.839) lessthanhs 0.630 (0.361) somecollege 0.919 (0.335) college 1.164 (0.618) hhsize 0.863 (0.0950) Male 1.092 (0.413) Constant 5.583 (19.80) Observations 320 R-squared 0.153
Notes: *** p<0.001, ** p<0.01, * p<0.05. Loan specific weights used in analysis.
© 2012 Center for Financial Services Innovation
Consumer’s Reason for Borrowing
• Motivating Question: Is there a connection between consumer’s reported reason for turning to SDC and loan outcomes?
• Primary Reasons for Needing to Borrow – Unexpected Income Drop (~25%) – Unexpected Expenses (~32%) – Expenses Routinely Exceed Income (~30%) – To Make a Major Purchase (~8%) – Bill or Payment Due (~32%) – Money Spent Paying Off Previous Debt (~9%)
© 2012 Center for Financial Services Innovation
Consumer’s Reason for Borrowing
• Motivating Question: Is there a connection between consumer’s reported reason for turning to SDC and loan outcomes?
• Primary Reasons for Needing to Borrow – Unexpected Income Drop (~25%) – Unexpected Expenses (~32%) – Expenses Routinely Exceed Income (~30%) – To Make a Major Purchase (~8%) – Bill or Payment Due (~32%) – Money Spent Paying Off Previous Debt (~9%)
© 2012 Center for Financial Services Innovation
Consumer’s Reason for Borrowing
Are borrowers who report needing to borrow because their expenses routinely exceed their income
more likely to:
• Payday: Rollover • Pawn: Extend term of loan • Autotitle: Refinance Loan • Salary Advance: Use Loan Next Month
© 2012 Center for Financial Services Innovation
Payday Rollover
OLS Regression Predicting Payday Rollover Notes: *** p<0.001, ** p<0.01, * p<0.05. Loan specific weights used in analysis.
(1) VARIABLES howmanyrollover whyborrow_expexceedincome 2.738* (1.205) paydaybyincome 6.773e+06* (4.646e+07) urban 0.368 (0.197) loghhinc 1.426 (0.512) firsttime 0.483 (0.204) black 0.750 (0.317) hispanic 0.552 (0.329) other 0.747 (0.431) age 0.988 (0.0107) married 1.148 (0.390) widowed 1.637 (1.227) cohab 2.781 (2.255) divorcedorsep 2.024 (1.241) lessthanhs 0.528 (0.320) somecollege 0.896 (0.359) college 0.960 (0.536) hhsize 0.864 (0.102) male 0.935 (0.358) Constant 0.422 (1.597) Observations 320 R-squared 0.094
© 2012 Center for Financial Services Innovation
Pawn Extension
Logistic Regression Predicting Pawn Loan Extension (1) EQUATION VARIABLES odds ratio pawn_extended whyborrow_expexceedincome 2.730* (1.097) pawnamtbyincome 0.441 (2.071) urban 0.482 (0.294) loghhinc 1.161 (0.287) firsttime 1.261 (0.557) black 1.223 (0.573) hispanic 0.821 (0.446) other 0.0995* (0.0898) age 1.001 (0.0166) married 1.719 (0.991) widowed 0.950 (1.260) cohab 1.187 (0.703) divorcedorsep 2.282 (1.443) lessthanhs 1.040 (0.571) somecollege 1.838 (0.803) college 1.833 (1.459) hhsize 1.021 (0.121) male 0.874 (0.342) Constant 0.0778 (0.178) Observations 272 Pseudo R-squared 0.0969
Notes: *** p<0.001, ** p<0.01, * p<0.05. Loan specific weights used in analysis.
© 2012 Center for Financial Services Innovation
Autotitle Refinance
Logistic Regression Predicting Autotitle Refinance (1) EQUATION VARIABLES odds ratio auto_refinance whyborrow_expexceedincome 8.642** (6.130) autoamtbyincome 0.000245 (0.00136) urban 0.270 (0.231) loghhinc 0.646 (0.315) firsttime 1.107 (0.853) black 6.902* (5.853) hispanic 7.279** (5.415) other 3.650 (5.429) age 0.995 (0.0286) married 0.620 (0.455) divorcedorsep 0.507 (0.655) lessthanhs 0.214 (0.218) somecollege 2.565 (1.988) college 0.936 (1.040) hhsize 1.267 (0.201) male 0.363 (0.277) Constant 24.05 (119.1) Observations 126 Pseudo R-squared 0.249
Notes: *** p<0.001, ** p<0.01, * p<0.05. Loan specific weights used in analysis.
© 2012 Center for Financial Services Innovation
Salary Advance Next Month
Logistic Regression Predicting Salary Loan in Subsequent Month (1) EQUATION VARIABLES odds ratio salary_loannextmonth whyborrow_expexceedincome 3.402+ (2.212) salaryamtbyincome 0 (0) urban 1.915 (1.327) loghhinc 0.523 (0.287) firsttime 0.225* (0.169) black 2.195 (2.180) hispanic 1.119 (0.837) other 0.531 (0.506) age 1.005 (0.0230) married 1.244 (1.088) widowed 5.565 (9.163) cohab 0.654 (0.499) divorcedorsep 4.642 (4.793) lessthanhs 6.092* (5.401) somecollege 12.14** (10.63) college 3.769 (3.527) hhsize 1.033 (0.225) male 0.516 (0.340) Constant 35.37 (202.2) Observations 137 Pseudo R-squared 0.259
Notes: *** p<0.001, ** p<0.01, * p<0.05, +p<.10. Loan specific weights used in analysis.
© 2012 Center for Financial Services Innovation
Summary Findings on Predictors of Repeat Usage
• Among payday borrowers, a higher loan to income ratio appears to be associated with more roll overs, net of other financial and sociodemographic characteristics.
• SDC users who report that their monthly expenses routinely exceed their income appear to be more likely to “roll over” or the equivalent across SDC products
© 2012 Center for Financial Services Innovation
Consumer Experience
55% 58%
61% 58%
49%
22%
12% 9% 10%
16%
0%
10%
20%
30%
40%
50%
60%
70%
Payday Pawn Direct DepositAdvance
InstallmentLoan
Auto Title Loan
Overall, How Satisfied Were You With This Loan? 1 (Not Satisfied) to 5 (Very Satisfied)
Rating of 4-5
Rating of 1-2
© 2012 Center for Financial Services Innovation
Consumer Experience Short-Term Medium-Term
Payday
Loan Pawn Loan
Deposit Advance
Install-ment
Auto Title
Fairness Overall, how fair did you consider the terms of your loan? 3.26 3.63 3.73 3.64 3.31 Average rating on a scale from 1 (Not Fair) to 5 (Very Fair)
Expectations % reporting cost of loan was more than expected 40% 19% 15% 26% 43% % reporting it took more time than expected to repay the loan 32% 29% 20% 17% 32%
Would you use the product again?
Yes, without hesitation 33% 44% 53% 45% 22% Maybe, if I have no better options 44% 44% 41% 39% 55% No 22% 10% 5% 14% 22%
© 2012 Center for Financial Services Innovation
Conclusions from our research • SDC consumers have a diverse and complex set of needs,
choices, and experiences
• Too many consumers rollover, refinance, repeat use and have very negative experiences
• Consumers would benefit from a multiplicity of safe, affordable, high-quality credit products and tools designed to meet different needs for different people
• Successful credit products will combine affordability with accessibility, speed, and clear terms
• Credit can play a role in consumers’ lives alongside (and possibly linked to) savings
• Sound underwriting will be critical to preventing repeat usage
• No easy answers here. There is still much to understand…
+
Jennifer Romich University of Washington Jody Meisel Seattle, Washington
Consumers’ Views on Small Dollar Credit
+ 11 Consumers Ages 39 – 70
Most had some college
5 homeowners
7 women
Spoke with interviewer for 1-2.5 hours
+
Describe your financial life and money management
“I’m recovering… kinda slowly but surely do get back to where I want to be, where I can be comfortable” -Bob “I don’t consider myself as low-income, but I made some bad choices in my life” -Jane
+ Why borrow?
“Tell me about the time when you decided to take out the loan, what was going on?”
“Everything. I can't remember any one specific thing. It was right around the holidays. …the water main had broken… And when the water came back in, it flooded my bathroom … [and] the holidays, I do know that much. I had to send [my daughter] some money from mom, and I can't remember precisely what it was, but anyway, I needed some money. “
+ Product choice
“I’m not trying to do a cycle where it just continues and continues…. I don’t like the idea of the interest rate being so expensive. [But] I understand it, because of the risk factors. “ -Jane
Photo: Rinkjustice
+ Loan experience
“Well you type in your name and your address and stuff and you turn it in. … then about 30 minutes later, you had a call, they asked me some questions about my work, how long I’ve been employed. ... And they said, ‘Ok, boom.’ The next day it was in my account.
-Luke
+ Impact When you think about your ZestCash loan, how has it impacted your financial life since you took it out?
“It really hasn't. It's just extra money that I got, well, ya know, I try to balance it, so that when I know the first payment, I pay what I got to pay, I take care of what I have to take care of while I got it”
-Ivy
“I think it has helped me when I’ve needed it (laughs). It’s helped me make sure I pay my other bills and stuff when I was stupid with my money, so I do think it offers a service. I think people just need to be smart about it.
-Luke
Thank You
40
Emerging Opportunities for Innovation in Small-Dollar Credit
Kim Manturuk Senior Research Associate in Financial Services UNC Center for Community Capital University of North Carolina at Chapel Hill
Pre-Conference Workshop on Findings From The Field – Consumers and Small-Dollar Credit
41
Small-Dollar Credit Customers Hard to Find
4% 2% 6%
11%
77%
Source: 2011 North Carolina Comissioner of Banks Consumer Banking and Finance Survey
Auto title loan
Payday loan
Installment loan
Pawn loan
No small-dollarcredit products
42
CFSI’s Compass Principals for Credit Products
Report to credit bureaus
Support repayment
Market transparently Price fairly
43
Very Short Term Loans = Too Short Term Loans
Low loan balance
borrower can repay quickly
High fees so lender can
achieve profitability
44
Disclosures Need Improvement
0%
10%
20%
30%
40%
50%
60%
Payday loan Pawn loan Direct depositadvance
Installmentloan
Auto title loan
Cus
tom
ers
who
did
not
kno
w lo
an c
ost i
n ad
vanc
e
Source: CFSI Research on Small-Dollar Credit
45
How Much Will This Loan Cost?
46
47
Convenience and Accessibility Are Important
48
Underbanked But Not “Under-Smartphoned”
growth in iPhone use in 2011
use mobile banking
Smartphone is primary internet connection
Sources: Fjord Consulting and Pew Research Center
Minorities own smartphones
49
Underbanked Borrowers Are Not High-Risk
55% paid at initial repayment date
38% extended loan
5% relinquished collateral
item complete default rate
Paw
n lo
an o
utco
mes
Source: CFSI Research on Small-Dollar Credit
50
Most Existing Products Do Not Meet Consumer Needs
Reasonable cost
Time to repay
Installment payments
Disclosures
Consumer needs
Profitability
Long-term customers
Cost covers risk
Lender needs
51
Strategic Partnerships Reduce Costs
Lender + Employer =
Lender + biller =
52
Technology Can Reach Underbanked Consumers
Payment apps Money management and savings apps Loan
apps?
53
Underbanked Consumers Operate Through Many Channels
54
Even Traditional Financial Institutions Can Succeed in Small-Dollar Credit
12% APR Includes savings
< 0.2% default ~200,000 loans/year
NC State Employees Credit Union Salary
Advance Loan
55
Research and Evaluation Are Crucial to Understand What Works