The Share of Payday Loans for Food is Growing in the USA

Approximately 42.5 million Americans are living below the poverty line, and many people are already ready to buy food on credit. MFIs are seeing an increase in the share of payday loans for food, and although it is too risky to lend to those who cannot even buy food with their own money, the segment has potential.

Most consumers who bought food on credit in 2021 applied for payday loans Gallatin TN. Such loans are easy to access and can be spent on whatever needs, even on the purchase of food. Eligibility criteria are relaxed – to get accepted for a loan, you must be an adult US citizen or permanent resident and have a source of income (any type of income is suitable – wages, scholarship, pension, social benefits, etc.). People with bad credit are also eligible for payday loans. The entire application is online and only takes 10-15 minutes. If approved, you should expect to have the money in your bank account as soon as the same day. Applicants are processed around the clock. The loan amount is usually limited to $1,000, the interest rate is individual for each borrower and depends on several factors, such as the request loan amounts and term, income size, your credit score, etc. 

Most customers take loans to buy strong alcohol and expensive snacks, and the peak of sales fell on New Year’s holidays. The number of payday loans issued for the purchase of food in groceries also increased.

People buy food on credit more often

The crisis and its consequences – layoffs, delayed wages and a general drop in real incomes of Americans amid growing inflation – led to an increase in the number of payday loans for urgent needs, including food. Microfinance organizations noticed this trend back in 2014.

So, at the beginning of 2014, loans for the purchase of food and consumer goods accounted for 17%, in 2021 – already 34%, according to surveys of microfinance institutions. At the moment, the share of payday loans for urgent needs is already 40-50%. “This, of course, is food, as well as clothing, medicines, payments for housing and communal services, etc. Due to job cuts, lower wages and inflation, the real incomes of citizens are no longer enough to buy the necessary things,” experts say.

The segment has the potential; today every third payday loan is issued for the purchase of consumer goods. For the rest of the goals, on the contrary, there is a negative trend. In 2020 12% of payday loans were taken to buy clothes and shoes, today it is already 6%. The share of loans for the purchase of electronics and household appliances has halved. 26.2% of borrowers took out payday loans for operating expenses, which include spending on food, communications and transport.

There are no companies in the USA that specialize specifically in issuing loans for food, so this is a new niche. However, the practice of selling food on credit already exists. So, MFIs lend money that the borrower can spend on anything, including on food. Bank credit cards usually do not imply a specific purpose for which the client uses the credit limit.

Some retail chains sell food on credit to boost demand. The loan amount in such groceries is limited to $1,000, the term and conditions are determined individually, and the loan is issued without interest, subject to the repayment of the debt in due time.

In addition, the practice of taking food on credit has long been widespread in rural areas: in villages, such loans are issued in small tents and shops to working customers who are in a difficult situation due to delayed wages. Such transactions, of course, are not formalized in any way, they do not imply any interest and are based on the personal relationship between the seller and the buyer.

Too poor borrowers

And, although the niche remains practically free, and the demand for such lending is only growing with inflation and falling incomes, MFI representatives say that the risks are too high.

Providing a loan for goods such as food is too much. The potential of this segment is small. These products are unlikely to be popular. Companies that provide loans of this kind are likely to understand that the client will not be able to pay off their debt. It is necessary to clearly understand that a loan should improve a person’s life, and not put him or her in a hopeless situation.

If the borrower does not have enough for the most necessary things – food, then things are going very badly for such a borrower. As a rule, such citizens should not borrow funds from MFIs, banks, etc., but demand assistance from social protection authorities.

Prospects for cooperation

However, this segment has potential in the case of close cooperation between retail chains and MFIs, large investments in scoring systems that help determine the borrower’s solvency, and a competent tariff policy.

If the rates are incomparably higher than the rates on credit cards and at the same time the loan approval procedure is stricter than that of MFIs, then the service may not find its client.

Investments in scoring are also important. Dealing with such risks should be incorporated into the business model. Progressive scoring methods allow them to be assessed at a fairly high level.

For large cities, such a practice can be viable due to the presence of a database of borrowers, access to their credit history and, of course, a collection service. Operating with instruments gives high financial costs, so, of course, the interest on such loans will be high.

According to the forecast of experts, such a scheme will occupy less than 0.1% of the entire microcredit market and, due to a possible change in legislation, not in favor of collectors, it is subject to great risks.

But in general, this direction of lending in the current economic situation has potential, since the share of the poor is growing. According to a recent study, the share of the critically poor urban population in the country is 10%, the share of the poor is 54%, and this share is increasing.

Category: General

Tags: finance, loans online, money, payday loans