The demand for payday loans in Minnesota from January 31 to May 2022 increased by one and a half times compared to the same period last year, GlobalData reported. The possible reasons are the desire of Americans to buy the necessary goods before the growth of prices, as well as tough requirements in banks. Market participants record a decrease in demand for Minnesota payday loans by up to 40%. Interviewed experts note that the increase in the key rate has made new borrowings inaccessible for a significant part of MN residents. But expensive loans from microfinance institutions against the backdrop of expected unemployment may lead to an increase in the debt load of citizens.
What triggers loan growth?
In late February and early March 2022, the demand for loans increased by 50% compared to a year earlier, according to GlobalData. Compared with previous weeks, the number of requests for loans increased by 8%, they reported, adding that in general, the growth in demand is typical for all US states. During this time, the number and volume of short-term loans also increased by one and a half times compared to 2021, and the average amount increased by 12%, reaching $550.
“Now many people take out a payday loan to quickly buy goods or services for fear that they will rise in price. For example, a 1.5-fold increase in the share of Minnesota payday loans for the purchase of spare parts and car repairs was recorded in just a week,” GlobalData shared.
Most of the applications were received in the period from January to March: in the retail network, the growth was 50% by the beginning of the year, online – 60%. The increased demand is due to the need for large purchases of customers in the face of rising prices for food and equipment.
However, now interest in payday loans has fallen somewhat, which indicates a decrease in the impulsiveness of customers, the experts added. So, when compared with mid-February, there is an increase in requests by 10%, which is explained by the seasonal factor, GlobalData pointed out. At the same time, the issuance remained at the level of the previous week and 2021: this is due to a change in scoring settings, as well as a decrease in the level of approval.
An increased demand for payday loans can also be explained by tightening requirements for bank loans. The flow of applications for loans from microfinance institutions at the end of February increased by 10%. However, something else is more important for the market: an increase in the quality of customers as banks tighten their approval policies. At the same time, according to the experts, there is no increased demand for loans.
In February and early March 2022, the interest of citizens in loans increased by 180% compared to the previous year, according to the statistics.
Reduced availability
At the same time, as the GlobalData poll showed, the top 30 banks recorded a decrease in requests for bank loans. So, in TD Bank, the demand for personal loans fell by 40% compared to last year and the beginning of 2022. Mortgage applications decreased by a similar level, the organization added.
At the beginning of 2022, the number of applications for mortgages and personal loans decreased slightly, TD Bank reported. A drop in interest in personal loans is noted in Marcus, U.S. Bank, PenFed, and Wells Fargo. In PenFed, they record an increase in mortgage applications by 33% in January-February 2022 compared to 2021, but from March to May, on the contrary, there is a more than twofold drop.
The tough borrower requirements have made bank loans inaccessible to a significant part of Minnesota residents, as reported by Minnesota Business Finance Corporation: as a result, this has led most of them to apply for online payday loans that are easy to access. However, consumers are often biased in assessing their capabilities and forget that payday loans can be very expensive when treated irresponsibly.
Those who fail to service their debts will harm themselves and the microfinance market. On the one hand, consumers will close their access to legal creditors, and on the other hand, they will push organizations that do not have reserves and a margin of safety, like banks, to leave the market.
The dynamics of the market are difficult to predict now as both banks and payday loan providers will tighten their lending policy, and their availability will decrease. Besides, the lending market depends on the economic situation, which is unstable now.