As holiday debt increases, small-dollar loans emerging as stabilizing solution

The hectic nature of the holiday season is upon us, and that means a lot of things to a lot of consumers these days; mainly, figuring out how they are paying for it.

Indicating consumers’ limited budgets, a January 2023 holiday debt survey by Lending Tree revealed that more than a third, or 35 percent, of Americans took on debt to pay for their purchases in the prior yuletide season, which is actually a slight decrease from 36 percent in 2021. Unfortunately, consumers racked up an average of $1,549 in holiday debt, up a full 24 percent from $1,249 in 2021.

Just as unsettling, more than a third, or 37 percent, of survey respondents claimed they expect to take five months or more to pay off their debt, increasing from 28 percent in 2021. In fact almost two-thirds, or 63 percent, of those who took on holiday debt claimed they didn’t expect to do so, compared to 54 percent in 2021.

Accessible but unhealthy credit driving holiday debt

With the continued evolution and acceptance of digital transformation, the credit union movement is gaining steam by onboarding digital small-dollar lending platforms. Such automated lending programs are perfect for that financially-healthy holiday loan of which those same consumers can take advantage. Once paid back, the benefits include improving the member’s credit score and elevating their financial standing with the cooperative, overall.

But consumers by and large still seem resistant or unaware of the benefits of the small-dollar loan as opposed to completely abusing their credit cards or mistakenly employing all the ill-advised “buy now, pay later” (BNPL) corporate financing programs to purchase holiday gifts for the family.

It’s understandable, though, given the ease and convenience of the credit card. Readily available, with the simple capability of paying it back. The consequences, however, have consistently come back to haunt consumers. According to the New York Federal Reserve last August, household debt reached an all-time high while total credit card debt broke $1 trillion for the first time.

“Household budgets have benefitted from excess savings and pandemic-related debt forbearance over the past three years, but the remnants of those benefits are coming to an end,” said Elizabeth Renter, data analyst at NerdWallet. “Credit card delinquencies continue an upward trend, a growing sign that consumers are feeling the pinch of high prices and lower savings balances than they had just a few years ago.”

As increased use of cards grew, so did the corresponding delinquency rates.

“Credit card balances saw brisk growth in the second quarter,” said the New York Fed’s regional economic principal Joelle Scally. “And while delinquency rates have edged up, they appear to have normalized to pre-pandemic levels.”

And do we even need to explain the issues with BNPL plans? The doubts aren’t necessarily due to lack of security; the issue is the inherent concerns associated with them. The first is that, while convenient just like credit cards, BNPL is prone to encourage many consumers to overspend, particularly when the pressure is on during the holidays. Second, companies that employ BNPL have the option to collect significant amounts of information and data on customers, signaling privacy issues that could come back to bite consumers.

Lastly, unlike mainstream credit unions’ small-dollar lending products, BNPL does little to nothing constructive in helping to build good credit. What’s more, if the consumer fails to pay back a purchase over time, their account can be forwarded to a debt collector, doing serious damage to their credit score. That doesn’t even count the debilitating debt fees incurred, or freezes to their account that prevent future purchases.

Finding healthy holiday financing at your local credit union

Considering the foundational nature of the credit union-backed small-dollar loan and the ease with which to access them, it’s difficult to justify the mentality of using such risky or unhealthy financing arrangements as BNPL, credit cards, or heaven forbid, predatory payday loan outfits at the strip mall down the street.

That’s why case studies stemming from member-first cooperatives like Tropical Financial Credit Union can provide an inspirational and practical example of the immense success that can be found for members just looking to get through the holiday shopping season unscathed. Each year members look forward to TFCU’s annual Black Friday Loan promotion. Members love to take advantage of holiday savings. They finish their shopping early and can focus on those who matter most to them during the season. This three-day promotion does 300 percent more transactions than are done in a typical month.

Another account came to us from a credit union that shows the versatility and convenience of this new age of digital lending. The cooperative never had a difficult time drawing members who needed the financial security and supportive assistance of a holiday loan from their local credit union. That wasn’t the problem.

They were actually receiving too many loan applications! The credit union was still employing manual processing with an understaffed and overworked lending department. While they processed as many as they could, the credit union simply could not catch up to the holiday demand. They stopped advertising the loan. Each year, members came into the branch asking for the holiday loan. And while the credit union can manage these specific requests, they can’t serve everyone. They had to do something.

But this year will be different! The credit union has a new automated holiday loan, a part of their suite of specialty loan products. With the burden taken off the shoulders of credit union staff, the speed with which the automated loans will be processed, and the freedom to advertise to all members, the cooperative will experience a record-breaking number of holiday loans this coming holiday season.

Inspirational, hopeful, and proven stories of success like these are growing increasingly common with fintech and automated digital lending in credit unions across the U.S. Whether the aim is accessing funds for the holidays or simply bridging the gap between pay days, the possibilities for financial inclusion and wellness are now exponential for members everywhere.