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Borrowing to Meet Financial Obligations: An Increasingly Uphill Challenge for the Financially Exposed

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by derailedcapitalism
Tuesday, Sep 21, 2021 - 22:35

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These are far from “ordinary” times. And, when it comes to the personal financial status of many Americans, the “ordinary” gets less so with each passing month. In fact, each day that goes by brings more personal finance challenges to individuals and families. Though governments at all levels, Federal, State and Municipal, provided pandemic-related emergency financial relief to qualifying individuals and households, that lifeline is set to dry out soon in most jurisdictions. When that happens – what’s next? Where do Americans, in need of urgent financial assistance, go?

Not Comforting Numbers

A survey, termed Mind over Money, and sponsored jointly by financial company Capital One and think-tank The Decision Lab, indicates that three in four Americans – that’s a whopping 77%! – report feeling anxious about their finances. And more than half of those surveyed – 58% - believe their financial situation is controlling their lives (instead of the other way around!).

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 And there were more troubling disclosures from that survey too:

  • 68% of Americans are worried that they don’t have enough savings to retire
  • 56% of those surveyed are unable to navigate around the high cost of living (inflation)
  • 45% are finding debt management a challenge
  • 43% feel fatigued and exhausted due to finance-related stress
  • 42% of those impacted find it harder to focus at work; and
  • 41% of the surveyed population are (literally!) losing sleep over their finances

And all this is taking a toll on America's relationships, and impacting their ability to save. Neither are they able to plan spending wisely. And there lies the issue: Less savings, and less thoughtful spending habits breeds additional financial stress. When that happens, it could impact an individual’s credit scores, and that may have a ripple effect. Some traditional lenders – banks, credit unions, insurance brokers, mortgage companies – may deny offering individuals, with poor credit scores, a financial lifeline.

Savings Under Pressure

When faced with tough financial times, people count on their personal savings first, before reaching out for a financial lifeline from a lender. And Americans are no different. The US Federal Reserve Bank (the Fed) defines personal savings rate as:

“Personal saving as a percentage of disposable personal income (DPI), frequently referred to as "the personal saving rate," is calculated as the ratio of personal saving to DPI. Personal saving is equal to personal income less personal outlays and personal taxes…”

In other words, personal savings reflect any residual amount left over after American’s have met their day-to-day expenses. And lately, there’s a lot less leftover than just a year ago!

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According to personal savings data released by the Fed, in April 2020, American’s had a personal savings rate of 33.8%. As might be expected, that unusually high percentage may be attributable to pandemic-related spending curbs. However, since then, the population is saving less of its disposal income, down to 9.8% as of July 2021.  Clearly, personal savings are on the decline.

It’s very likely, therefore, that many Americans will reach out to their “trusted” banks for credit, to see them through during hard times. Unfortunately, there’s more bad news on that front too. According to Q1 2021 Fed data, Americans are already spending 12.87% of their disposable income on meeting their financial obligations.

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This metric, measured by America’s Household Debt Service and Financial Obligations Ratio, tracks a broad set of financial obligations, including rent payments on tenant-occupied property, auto lease payments, homeowners' insurance, and property tax payments.  Of that amount, 8.22% goes directly to servicing household debt – which, although on a downward trend, is still a significant component by most measures.  

Impending Financial Perils

So, why should numbers like these concern the average American? The answer: Because of what lies ahead! With interest rates at historic lows, it’s unlikely that savers will be rewarded for a long time to come. And with government support set to end soon, many Americans who can’t find work will find their financial lifeline further curtailed.  But that’s not the worst of what’s to come.

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Fed inflation data suggests that, at 4.8%, the rate of inflation is the highest in decades (it was 4.2% in 1991). That means higher costs for everything: Food, Rent, Child Care, Transportation, Gas, and Utility bills.  This situation is likely to push even more people to the financial edge, forcing them to borrow and go into other forms of debt.

And there lies yet another challenge: Turning to conventional lenders, as a source of loans or lines of credit, might not be viable for many Americans with bad, low or no credit scores. Most tier 1 lenders want collateral – which many Americans can’t provide – to secure their loans.

Assured and Unsecured

So, with a bad credit, or with no credit score or history, how can you meet your financial obligations when your “trusted” financial partner turns their backs on you? Well, when certain financial institutions deny you a financial lifeline, an online direct lender might be your best bet to apply to borrow money when you need it most. it’s relatively easy to secure the loan you need by using an unsecured installment loan or lines of credit financing.

Unlike certain lenders, direct online lenders don’t work through brokers and commission agents, who usually add a layer of fees and commissions to any posted rate. Because they lend directly to the borrower, without an intermediary, the fee structure is “flat” – what you see is what you pay. And although your loan is unsecured, you are typically assured of receiving the funds if you qualify. And the money can hit your bank account in a matter of days – if not earlier.

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