The Predicted Surge in Short-Term Loans
To put it very bluntly, the coronavirus global pandemic has devastated our national economy in a way that we haven’t seen since the Great Depression.
More than 40 million people are unemployed in the United States right now. The stock market has become a roller coaster (hitting record highs and then record lows, bouncing all over the place and then back again with no real rhyme or reason), and 40% – if not more – of all small businesses believe that they won’t ever be able to open back up again after the coronavirus has subsided.
Things are bleak.
Because financial situations are so dire right now, we are seeing a huge increase in people digging into their savings accounts and their emergency funds, as well as folks having to turn to traditional and nontraditional short-term lending solutions just to get by.
Why short-term loans make sense right now
According to a study done by AARP, almost half of Americans report that they are nervous about running out of money, including 86% of individuals that have been fired or let go from their jobs and still haven’t seen a penny of unemployment yet.
More than 1/3 of Americans are taking on record amounts of credit card debt with little idea of how they are going to pay things back when the economy does get jumpstarted. This is leading to all kinds of financial companies and lenders deciding to defer payments until later down the line.
Now that we’re starting to see the economy regain a bit of momentum, those in the financial world are making predictions about how people are going to navigate the current and future financial uncertainty.
Most believe that Americans are going to turn to short-term lending solutions in ways and numbers we haven’t seen ever before. Some of the financial world wonder if lending companies are prepared for the crush that’s about to open up.
Credit Cards and Payday Loans
There are two types of short-term loans that financial experts, banks, and lending institutions predict Americans are going to turn to more than anything else and that’s credit cards and payday loans. Title loans, another type of short-term loan, will also see a rise in applications.
Credit cards are (obviously) some of the friendliest and most flexible short-term lending options out there in good economic times, but things can spiral out of control in a hurry when you find yourself having a tough time meeting minimum payments or regular monthly payment dates.
On top of that, credit cards almost always require you to have at least halfway decent credit to get even close to a sizable credit card limit. Getting a starter card with $250-$300 isn’t all that difficult, but getting a card with even $500, $1000, or $5000 (or more) is only going to be possible if your credit is already decent (if not better than average).
That’s not going to be the reality for a lot of people hit hardest by the coronavirus economic meltdown.
Why payday loans rise during an economic downturn
Payday loans, on the other hand, really became popular in the wake of the Great Recession of 2007/2008 and have continued to be a source of alternative lending for those that have a tough time working with more traditional banks and credit unions.
Unfortunately, the reality of payday loans can be quite a bit darker than how they are described to potential customers – promising a financial life raft when in reality you are simply eliminating current headaches while creating serious and significant financial issues later down the line.
Credit unions, banks, and traditional lenders are nervous that we are going to see a huge uptick in the use of short-term loans and high-interest payday loans in specific as soon as the “pause button” on cancellations, and other payment penalties are lifted at the country reopens.
Several states (including Nevada and Indiana) have already built a couple of systems to track the economic impact of the coronavirus as well as to have a closer look at what consumers are doing to get themselves out of these financial hardships.
Indiana saw 54% payday loan transactions in April 2020 compared to the year before, but that’s before the coronavirus took off and before the full impacts of the virus on the economy were felt. Experts believe that we are going to see a reversal in trends sooner rather than later.
Uncertainty lies ahead
The biggest problem with this reversal is that we appear to be making great progress towards lowering the number of people that needed to turn to these kinds of loans in the first place. The economy was back on track, the stock market was shattering record highs almost every week, and unemployment was reaching record low numbers – and just like that, it feels like a switch was flipped with this virus and all that amazing progress not only screeched to a halt but it was wiped away almost entirely, too.
Unfortunately, the only thing we know for certain about the economic impacts of the coronavirus is that it has been devastating and it’s now that likely that we are going to be able to turn things around on a dime overnight.
It’s important to remain optimistic. It’s important to have a positive attitude about how we will rebuild the economy and the nation, but it’s equally as important that you aren’t sacrificing your long-term financial future for short-term relief that isn’t relief at all.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes