Despite reports of slow economic recovery, many households are still facing acute financial problems.
A study conducted by the University of Virginia revealed that nearly 10% of households in Virginia use personal loans regardless of their interest rates and payment terms. Of these, 120,000 or 4% take advantage of payday loans, 95,000 or 3% use pawn loans, and at least 100,000 households or 3.6% lease home properties to rent-to-own stores.
Moreover, within a four-year period (from 2016 to 2020), 70,000 households from Virginia have used tax-refund anticipation loans and about 150,000 used auto-title loans. These short-term loans end up as repossessions if the loan is not paid in time.
According to the study, 275,000 families use high-interest, short-term loans to pay for their basic necessities such as transportation, housing and food. The same number of households will also apply for loans to pay for sudden expenses such as medical bills, auto repairs or unexpected job loss.
The federal banking statistics noted that black Virginia families are more likely to use alternative-financing schemes than white households. Evidently, lending companies target neighborhoods with more black households.
The study, however, is limited and does not establish whether these businesses are found within the neighborhood because residents use such loans, or whether households use these loans because they are easily accessible.
An earlier study conducted by the Cooper Center revealed that almost 25% of households in Virginia earn less than their basic needs, and nearly 28% do not have cash savings, assets or a financial buffer to support their unexpected financial problems. Families in the low-income bracket are the ones who frequently apply for alternative loans. Unfortunately, these alternative financing sources consume their financial reserves.
According to Rebecca Tippet, the study author, alternative loans target low-income households by extending their paycheck. On the downside, these financial services undermine their capacity to build financial security.
Unlike mainstream credit unions and banks, these alternative lending companies offer short-term loans in smaller amounts but at considerably higher interest rates and charges. In effect, borrowers repay up to triple-digit interest rates and fees when combined.
Among the US states, Virginia remains one of the few that allows every kind of financial service, although the state has begun regulating auto-title and payday loans. As of date, auto-title lending is prohibited in 26 states and payday lending is banned in 13 states.
In a separate study, it showed that 90% of borrowers apply for short-term loans despite having conventional bank accounts because of their convenience and ease of processing. Borrowers think that it is much more difficult to qualify for loans offered by mainstream loan providers than from alternative financing services.
According to Tippet, conventional banks and credit companies need to develop alternative products to offer this market.
Although State laws have been put up to curb use of these alternative financing services, there are no alternatives available for some people to use. Policy makers from all levels must continue to explore ways to address this need.