Personal Loans Fill Cash Flow Void for Paycheck-to-Paycheck Consumers

There’s been a confluence of events to set the stage for retail banking’s disintermediation — and for the growth in lending facilitated by online platforms to continue.

LendingClub Financial Health Officer Anuj Nayar said regulations have been updated, connectivity has improved, and everyone has computing power on their desk or in their pockets.

As a result, personal loans will be embraced by cash-strapped consumers, yes, but even by individuals and families with healthy incomes.

Looking ahead, said Nayar, demand for personal loans (currently used by 24% of the general population) is slated to increase. We may have, collectively as a society, saved money during the pandemic, but economies are reopening, so the main drivers of credit spending (that would be consumption) are moving back toward positive territory. When people take on more debt, they will wind up embracing personal loans even more often in a bid to manage cash flow.

The conversation came across a backdrop in which the latest iteration of the Paycheck-To-Paycheck Reality Check Report found that 32% of millennials and bridge millennials who live paycheck to paycheck use personal loans.

Read more: Living Paycheck to Paycheck Triggers Personal Loan Demand

That’s a higher rate than we see in other age brackets, but Nayar said that “it’s not surprising” that millennials would turn to those loans.

As he noted, this generation has been “bookended by the last two major recessions.” They graduated high school just after the 2001 recession, and then faced the great financial crisis and subsequent great recessions during the first years of their working lives, and into the peak earnings years of their early 30s.

Cash Strapped and Taking on Debt

Along the way, they took on a lot more debt, said Nayar. College costs led to high student loans, and the average millennial has more than $27,000 in personal debt, excluding mortgage loans, spanning credit card debt, installment loans and beyond.

Thus, they tap personal loans in a bid to reach new milestones in their lives — as they get married, start families or buy homes. With the pressures of being the “sandwich generation,” and taking care of kids while simultaneously taking care of elderly parents, millennials are finding succor in personal loans.

That’s not to say that only younger demographics are borrowing. The same report found that 57% of personal loan users are not having trouble meeting their financial obligations.

As Nayar stated, personal loans have become a “mainstream financial tool to tackle debt and manage cash flow so they can do things like plan for the unexpected and build a savings cushion.”

Most Americans, he said, have less than $2,000 in savings, and a single event — a medical emergency, car accident or the need to send money to a family member — can wipe out that cushion.

So, consumers take out these personal loans to get out of debt, such as credit card loans, consolidating those liabilities in a bid to pay them off or pay them down. That frees up capital to build up the (quite useful) cash cushions.

“It can be useful to not have to remember all of these different due dates to pay off all the different debts one may have accumulated over the years,” said Nayar.