Cash Advance Payday Loan Market

Current USA Market

The USA payday loan sector is poised for volume growth of 8-10% over the next 3-5 years unless additional new safe harbour legislation is passed. Consolidation and exit of small loan chains such as “Household Finance, Associates, Beneficial, Avco have created a void for the sub $1000 loan. Additionally, increased NSF fees and stigma of “bouncing” a check has created what we refer to as a “credit conscience” which means that many clients strive to maintain acceptable credit and will use short term loans to bridge their needs. Household incomes, on average are not expected to increase and may well continue to decline in the near term.

Market Drivers

There are several catalysts for growth in this industry, including demographic trends, heightened consumer awareness and new product offerings.

Median Household income is an important leading indicator. With declining household incomes at an increasing rate the traditional payday loan client is unable to graduate to the next level of financial loan instruments.

The credit history of consumers is very important in determining the cost of long-term credit for all households. Acceptable credit or the lack of can mean significantly different interest rates on home and auto loans.

Repeatable late payments or consistently bad payment history can result in the need for large deposits for utilities, telephone services which may render these services unattainable for consumer households. The reasons for the rapid growth in the payday advance loans has as much to do with the financial reasons that a client uses the product as it does with the growth in storefronts and availability. Simply put, the consumer has always needed the product and the industry is meeting that need.

Credit quality of payday clients improves during a flat economy.

[Source: US Census Bureau]

During recent periods of strong employment and economic growth, consumer credit has increased and households have generally movedup the credit alder to less expensive financial products.

Additionally, lover income and unemployed households have been able to access financial services that are unavailable in slow economic times. The pool stays the same but the quality deteriorates during good economic times for the sub-prime consumer finance companies.

In converse, during a recession or period of flat economic growth, some households fall out of the consumer finance borrowing pool [due to unemployment and other reasons] and some households drop down from different forms of credit. The pool remains constant in absolute size but the actual underlying household quality grows in a down or flat economy.

The average credit statistic of most small loan and payday loan lenders have borne out this belief over the past 3 years. In 2001, credit losses were higher than in 2000 and settled back to 2000 levels in 2002; and have improved in 2003. As long as incomes remain flat to down we expect losses to remain at the current levels with demand at or above current levels. In a more expansive economy, we would expect a slow rise in credit losses. DO not expect salary levels to return ot 1999-2000 levels until 2005/6 and will need expansive economy. Therefore the payday loan industry will continue to gain strength.

In USA:

• 82% of financing is for home purchases or real estate related purchases.
• 3% of debt is on credit cards
• 12% on instalment consumer loans – student loans, auto loans, loans against durable goods.

Payday loans best fit in the latter category. Generally unsecured loans categories have been shrinking as other forms of lending have increased or less finance sites are offering this type of loan.

In summary, payday loans comprise a part of a small and relatively shrinking pool of borrowing capacity for the US consumer. At the same time, alternate sources of credit, such as revolving credit, have not increased to fill the void.

In the absence of available alternatives, under-banked and marginalised US consumers will continue to turn to payday loans ass their most convenient source of unsecured credit.

Source - Client Profile [Georgetown University 2001 study]

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