With today’s era of cheap credit and record-low interest rates, financial experts scoff at the notion of taking out payday loans or applying for auto title loans. According to the money managers of the world, why would you ever take out a payday loan when you can get credit at historically low rates?
As a new report suggests, not everyone can gain access to cheap credit and low rates of interest.
Millennials – those born between 1980 and 2000 – are more likely to take out payday loans or pay higher rates on traditional loans and credit cards than those born before, says a new study by Toynbee Hall, SalaryFinance and the London Guardian. And this is a troubling trend for millennials as they get older.
Researchers found that millennials were twice as likely to take out short-term, high-interest loans than Baby Boomers. They also discovered that millennials used companies that offer guaranteed or instant access to cash twice as often; older Baby Boomers had take out on average four payday loans, while millennials took out more than seven.
Why exactly are millennials not taking advantage of the credit boom and easy money in today’s economy? It’s simple: they have poor credit records compared to their older counterparts. The poor credit records are due to the fact that millennials lack a track record of payments or perhaps due to the fact that payday loans tend to drag down their overall credit scores.
Overall, millennial consumers are finding it hard to access traditional financial and banking options. If the trend continues then they can’t benefit from a guaranteed $20,000 personal loan with just three percent interest.
“With few choices, and the pressures of low-wage jobs and increased insecurity, borrowing money out of necessity can only be done through alternative finance like payday lenders or friends and family, and not everyone has the luxury of the latter,” said Carl Packman, Toynbee Hall research manager, in a statement.
“Not only are the borrowing costs of a payday loan much more expensive than with mainstream finance, we can now demonstrate very strong evidence that it is having a detrimental effect on people’s credit scores and therefore their ability to build up that score and access cheaper forms of finance in the future.”
Lenders examine a wide variety of factors to determine a consumer’s creditworthiness, says Andrew Hagger, a personal finance expert at MoneyComms. Many of the attributes that credit providers value tend to go against millennial borrowers – employment history, payment record, etc. – and this tends to serve as a “catch-22″ for the younger generation.
For millennials, the question is: how can you get a credit record if you cannot get access to finance.
Meanwhile, Asesh Sarkar, CEO of SalaryFinance, alluded to the fact that millennials now make up the majority of the workforce. With this statistic in mind, Sarkar says, employers need to get involved and help out millennial professional when it comes to mainstream finance.
“The government’s identification of the problems of the just about managing (Jams), who have less than a months worth of savings in the bank, support our urgent calls for better financial support systems for people in work but struggling,” Sarkar said.
These findings come one week after it was reported that students tend to turn to payday loans to help cover the costs of attending post-secondary institutions. It is decisions like these that can do more harm millennials’ credit scores than good.