An unbelievable forty-four (44%) percent of adults say they either could not cover an emergency expense of $400, or would cover it by selling something or borrowing money, according to the 2016 Federal Reserve’s Report on the Economic Well-Being of U.S. Households. Obviously, access to credit helps people manage the unexpected expenses that are a part of life. But what if you can’t access credit? According to Experian, 64 million Americans have no credit or a thin file. For those Americans, borrowing money at an affordable cost is challenging, if not impossible.
A $300 car repair may mean that a single mother cannot get her children to daycare or herself to work on time. This quickly results in lost wages and potential unemployment. When she takes out a payday loan to fix the car or pay late bills, she is pushed into an unsustainable cycle of debt, often paying two or three times the amount of the original loan in fees alone, before it is fully repaid. This exacerbates her family’s financial instability and creates overwhelming psychological and physical stress. In contrast, that same single mother could weather this short-term financial setback to her long-term advantage with access to a loan with a reasonable interest rate.
This is where Community Development Financial Institutions (CDFIs) and other non-profit lenders like credit unions come in. They are often the only lenders who will provide a loan to someone who is “credit invisible” (lacking a credit history) or who has poor credit.
Despite its necessity, Federal funding for Treasury’s CDFI Fund is at risk. The need for the CDFI Fund, which was created more than 20 years ago, is as strong today as the day it was established. Proof of the continued need for small dollar loans is found in the results from a recent survey by Credit Builders Alliance (CBA). CBA’s non-profit lender members were asked to forward a set of survey questions to their borrowers. Here are the highlights:
Why did you get a loan from us?
- 37% were unable to qualify at another lending institution
- 26% said you were the only affordable option in my local area
- 65% said they considered you trustworthy and reputable
- 6% said “other” reasons
Have you seen an increase in your credit score since getting a loan from us?
- 57% said yes
- 37% said I don’t know
This loan helped me to…
- 55%= Start or grow my business
- 35%= Improve my financial stability
- 22%= Avoid predatory lenders
- 11%= Pay for an emergency
- 9%= Qualify for other financial products
Finally, a whopping 98% said they would recommend their lender to another borrower.
These results confirmed what CBA has known all along: mainstream financial institutions do not serve everyone. Additionally, for those living in rural areas or in Indian Country, there is a dearth of affordable lenders. Finally, borrowers think highly of CDFIs and other non-profit lenders and almost all would be happy to recommend their services to family and friends.
Data is powerful but even more powerful are the individual borrower testimonials that were culled from this survey. When asked why they needed the loan, they said:
- “to retain 16 employees and create new jobs”
- “to provide a useable kitchen for my wheelchair bound teenager”
- “to get equipment I would otherwise not have been able to afford”
- “to pay for a much needed vehicle”
- “to save my reputation, I would have been run out of town”
In addition to the concrete outcome from receiving the loan, the indirect benefit of building a strong credit history can also be a transformative experience. Just listen and watch a powerful testimonial from Taylor Lawrence, a client of Four Bands Community Fund in the Cheyenne River Indian Reservation in South Dakota.
In conclusion, the following compelling research finding truly illustrates the value of access to credit. According to the study titled Poverty and Distribution of Material Hardship by Jencks’ and Mayer, “A family’s ability to borrow $500 had as much effect on hardship as multiplying its income by three.”