Payday Advances, Credit Card Spending and Layaway Loans on the Rise
By Lindsay Frankel
Now more than ever, Americans can gain access to new forms of credit directly from their smartphones. And while these convenient methods of financing might be helpful in an emergency, vulnerable borrowers are also at risk of falling into debt, a problem they might be able to avoid if these options were not available, experts say.
“This instant gratification in the financial world can be risky,” said Shelle Santana, a professor of business administration at Harvard Business School.
While household income may be increasing on average, rising costs of living have outpaced that growth, leaving most Americans unable to make ends meet. A recent study from Charles Schwab revealed that 59 percent of adults are living paycheck to paycheck.
And at least part of the problem could be due to non-essential spending, since Americans reported an average of $483 per month of spending on things that weren’t basic necessities. That’s a behavior that might be encouraged by instant access to credit.
Products such as payday advances, layaway loans, and credit cards don’t always have a negative impact on consumers. “The more that we are allowing consumers to have control over their finances and commit to healthy financial behaviors is a useful development,” said Santana, but she added that “it could spur more spending than what consumers are capable of or what would be healthy for them to take on.”
The number of companies offering employees instant access to earned wages through an app on their smartphones is growing. Businesses advertise accelerated pay as a perk, since it can help workers avoid costly alternatives, such as payday loans. Payday loans, which carry an average annualized interest rate of nearly 400 percent, have long been considered one of the most dangerous methods of borrowing.
Most payday advances have a transaction fee rather than an interest charge. Taking a payday advance is a much better way to manage irregular schedules and fluctuating income than using payday loans. But borrowers who are strapped for cash could still end up behind from taking too many advances, so while these advances are instantly available, they should only be used for emergencies.
Americans are also opening more credit cards than ever before. There are 1.4 billion active credit cards in America. Card issuers often provide appealing perks, such as rewards and sign-up bonuses, that lead customers to origination. But does having that line of credit encourage Americans to spend more than they can afford?
It would seem so, since Americans paid $40.3 billion in credit card debt in the first quarter of 2019.
Some retailers are also letting customers pay in installments, an option often called a point-of-sale loan. Though the loans are interest-free, since the retailer is charged a processing fee instead of the customer, they are meant to encourage borrowers to buy things they can’t afford all at once. While this might work out well for large purchases if the borrower can budget for the expense, it’s also an easy way for shoppers to afford things they don’t actually need.
Layaway financing has grown 15% a year globally since 2017.
As new options for accessing credit become available, Americans need to be aware of how debt can spin out of control, and take measures to reach financial stability rather than relying on credit.