6
Every year, millions of American consumers
use small-dollar credit (SDC) products for
quick access to cash. Yet, these products—
payday loans, pawn loans, direct deposit
advance loans, auto tle loans, and non-bank
installment loans—oen come with high fees
or interest rates and can lead consumers into
a cycle of repeat usage and mounng debt.
This study seeks to elucidate the reasons
why so many consumers rely upon these
potenally dangerous products and to glean
what can be learned from their experiences
to promote the development of high-quality
credit soluons.
Previous CFSI research has shown that SDC
consumers typically borrow for a variety
of reasons: to pay bills, cover basic living
expenses, pay for an unexpected expense, or
make up for a drop in income.
1
These ndings
can be interpreted in dierent ways. They
suggest that some SDC consumers may have
too lile income to cover their expenses and
that they might benet from beer jobs or
stronger income supports. Other consumers
may have sucient income but could
potenally reduce their need to borrow with
greater budgeng guidance to manage their
day-to-day nances. The numbers also make it
clear that increased savings could help many
households weather disrupons in earning
power or fund major purchases without
taking on costly debt.
For several reasons, however, income
supports, budgeng guidance, and addional
savings will not enrely ll the need for high-
quality credit. First, unexpected emergencies
and unplanned expenses will occasionally
surprise even those who are well prepared.
Second, well-structured credit can indirectly
support the ability to save by enabling a
person to fund short-term spending without
dipping into longer-term savings. Finally,
borrowing can help build a posive credit
history, a crical nancial asset in its own
right, since credit scores can aect decisions
to hire employees, rent apartments, set
insurance rates, and, of course, oer more
tradional forms of credit that can facilitate a
wealth-building purchase, such as a home.
To meet the genuine credit needs of
consumers, small-dollar credit must be
high quality. That is, it must be marketed
transparently and priced fairly. It must
be aordable and structured to support
repayment—without creang a cycle of
repeat borrowing or “rolling over” of the
loan—and should support credit-building.
Unfortunately, the vast majority of SDC
products currently available do not meet
these criteria. And, while there is a great deal
of informaon available about the naonal
volume of payday loans and the dangers of
overuse, relavely lile is known about SDC
usage from the consumers’ point of view
and across mulple products. To beer serve
SDC consumers, we need deep consumer
knowledge that can help providers develop
new and beer products and encourage
policymakers to pursue soluons that safely
meet borrowers’ needs.
With these goals in mind, the Center for
Financial Services Innovaon (CFSI), with
funding from the Ford Foundaon, has
conducted a mul-stage consumer research
project to examine the needs, decisions,
and experiences of SDC consumers. This
report represents the rst publicaon of
that research, a quantave examinaon of
a naonally representave sample of over
1,100 consumers of SDC products. We sought
to beer understand who these consumers
are, what precipitates their use of credit, how
they shop and choose among dierent credit
Introduction