Today, the American Financial Services Association submitted a letter to Secretary Janet Yellen in support of creating a Presidential Commission for Financial Inclusion at the Department of the Treasury. The concept was proposed by Democrat Sens. Christopher Coons (DE), Raphael Warnock (GA), and John Hickenlooper (CO). You can read the letter here. So, why do we need a commission on financial inclusion?
Today, nearly a third of U.S. consumers have subprime credit; five percent of U.S. households (approximately 7.1 million) are unbanked. One report found that far too many Americans – 63% – have been living paycheck to paycheck in the past two years, and another survey found that one-fourth of adults have trouble paying monthly bills and may be a single $400-financial-setback away from further economic disruption. And those setbacks were common, even before the pandemic an estimated 60% of households experienced a financial shock over a twelve month period.
In short, many U.S. consumers may find themselves unable to access savings or forms of credit – a credit card or a line of credit from a bank or credit union – that others access when necessary. Unfortunately, too many Americans find themselves needing access to responsible credit products when they encounter a financial shock.
Every household has a unique financial situation and should have the ability to find the most affordable and transparent financial service best suited to address their needs.
For over 100 years AFSA and its member companies have been there to increase access to equitable financial services and legitimate, fair credit products for millions of lower- and middle-income customers, including underserved populations. Our member companies provide credit to hard-working Americans of all economic backgrounds to help meet their everyday needs, whether those needs are planned or unexpected.
This credit typically comes in the form of high-quality, small-dollar loan products, such as traditional installment loans. At AFSA we define a traditional installment loan as a fixed-rate, fully amortizing loan repaid in equal monthly payments or installments. These products are not what policymakers typically refer to as “predatory loans,” such as payday or auto title loans. Traditional installment loans are state-licensed, affordable loan options that are available to many consumers, not just those with perfect credit histories. Installment loans provide a lifeline to consumers facing a financial shock or as an opportunity for consumers to improve their credit standing.
Research shows that approximately 85% of installment loans have monthly payments made up of 5% or less of a borrower’s monthly income, and the payments are structured to create a pathway out of debt. With an average traditional installment loan duration of 15 months, consumers have a reasonable opportunity to repay their loan in a suitable period without being trapped in an endless cycle of debt.
While a loan may vary based on a customer’s financial history and credit score, every consumer should have access to some form of credit in their time of need. But we often run into policymakers and advocates who don’t have a full understanding of our industry or don’t see the unintended harms of policies on the very people they are trying to help. A Presidential Commission on Financial Inclusion that is collaborative among policymakers, advocates, and the diverse financial services industries, will engender greater understanding of the resources available to – and out of reach for – large segments of our society, and help shape policies for a far more inclusive economy for all.
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