We’ve always known that the non-prime segment of the American population has not been doing well. Though the unemployment rate is at record low levels, the after-effects of the real estate and financial meltdown in 2008 and normal jobs being exceedingly replaced by gigs have left a lot of these subprimers in a precarious position. A report by Elevate’s Center for the New Middle Class, an online lender that has originated more than $3.7 billion in loans to this category, highlights through hard facts and figures issues being faced by this new middle class. It also busts myths about the various borrowing options available to them.
Sub-prime borrowers are those which have a credit score below 700 and basic lending products like low interest personal loans are not accessible to them. The report finds that almost 70% of the nonprime Americans can’t afford emergency expenses of $500 or more with their savings. The report also shows 64% wouldn’t be able to borrow that amount from friends and family and seconds the Federal Reserve Board’s finding in 2016 which revealed that 40% of Americans don’t have $400 in saving to meet any unexpected expenses.
Findings from the Elevate report: Paint a bleak picture
Additionally, the opinion that they can depend on other means of funding like friends and family or credit cards is also debunked by the new research. Almost 72% of Americans won’t be able to put a charge of $500 on their credit cards, this figure jumps to 80% if the amount is $2,000. 71% won’t be able to borrow the $2,000 from their family and friends. Surprisingly, only 1 in 5 Americans has borrowed money from friends or family in the last 12 months. This indicates that either they are not comfortable in asking for the money or maybe the money is just not there in their network.
This report provides powerful insight into what is actually going on in the financial lives of the new middle-class American. It also allows policy makers and fintech companies to design policies and products that target the actual pain point for millions of Americans who are not being served by their banks and traditional lenders.
Elevate’s Center for the New Middle Class
Elevate started this center to evaluate the economic behavior and daily challenges faced by this “New Middle Class” of America. This all is done through surveys, research, studies, and a continuous open dialogue with the members of this category. The research and results generated by the center help market players to develop products which are better suited to the needs of the non-prime borrowers.
This is the fifth paper published by the center, which tries to release one paper each month. Usual themes include the challenges faced by the non-prime borrowers and how they find it difficult getting that apartment, job, or utility connection just because of poor credit. Thus, they are stuck in a vicious circle because they can’t get a job without a good credit score and can’t get the credit score without previous credit. Obviously, they won’t get a loan without a job. Last month, the center released a paper on the issues faced by the married non-prime segment.
This particular paper is written to understand how much access this middle class has to the so-called “good options” (i.e. families and friends). These stats are completely opposite to the regular notion that it is easier to borrow money from friends and families, or borrowers should focus on having personal savings for drawing down for emergencies.
With banks already blacklisting the new middle class, and the families and friends option not the panacea we thought it was, it is important to help people get on that credit bandwagon so they can make the entry into the formal credit market. Being able to climb that ladder of credit score success has a domino effect on financial lives.
The New Economy
Almost 51% of non-prime borrowers admitted they have volatile or fluctuating income month to month. For 22% of them, it fluctuates to a level that can create massive issues if an unexpected bill comes due. These trends are exacerbated because of the emergence of the “sharing” and “gig” economy. According to an article on Forbes.com, there are almost 55 million freelancers in America comprising 35% of US workforce. This gives massive flexibility to the new age worker, but it also means that they do not get any perks of employment like job security, health insurance, or vacation pay. Uber, Lyft, and AirBnB are creating opportunities, but they’ve also have led to massive fluctuations in the income of millions of freelancers associated with them.
With more and more people falling under non-prime categories, it has become imperative for financial companies to understand the underlying matrix of this category. Almost 7% of respondents in the Elevate survey use bank overdraft as a form of creative financing, and 59% carry a regular credit card balance. Existing lenders have failed this new middle class, and understanding how this massive community thinks and functions will help new-age lenders develop credit products that will serve this category in a much way better way. Companies who can help them cross the credit hurdle are on their way to capturing a potential trillion dollar market.
Written by Heena Dhir.