Where do Americans turn when they have an unexpected expense but lack savings or access to traditional credit services?
Short-term and small-dollar loans are a lifeline for many people, particularly women and minorities. Fintech options utilize technology to place access to credit at their fingertips.
However, policymakers in states like Alaska have sought to restrict credit options to Americans. In Alaska, a harmful bill that passed the legislature was wisely halted at the governor’s desk.
Senate Bill 39 would have restricted access to lending options for Alaskans when they need it most. This bill would apply a 36% rate cap on consumer loans up to $25,000. SB 39 would have been detrimental to these women, individuals, and small businesses.
Thankfully, yesterday, Governor Mike Dunleavy vetoed this bill, scoring a win for financial security and economic mobility in Alaska.
Alaska’s Financially-Crunched Population
Many Alaskans are cash-strapped:
Some 17% of Alaskans (approximately 125,000) are unbanked or underbanked.
Approximately 230,000 individuals (31% of Alaskans) have limited credit history or poor/fair credit.
Twenty-four percent (approximately 175,000 households) report difficulties covering usual expenses.
These individuals hold down jobs, but four years of high inflation and high borrowing costs have made it difficult for many people to manage an unexpected expense such as car repairs, home repairs, or medical bills.
When a person has subprime credit or is considered a high-risk borrower, taking out a personal loan or credit card to cover the unexpected expense may be off the table. As my testimony to the Alaska legislature last month explained:
We know from recent research that Americans who are cash-poor … are largely young, female, and racial minorities. Many are unbanked or underbanked, have subprime credit, and cannot readily secure credit through traditional means such as banks and credit cards. They depend on different forms of credit, such as short-term loans from fintech lenders, to cover expenses. Fintech loans have improved borrower credit scores, particularly among lower-income, black, and Hispanic consumers.
Good Intentions, Bad Outcomes
Proponents of policies that restrict credit options, such as small-dollar and short-term loans, to high-risk borrowers think they are keeping poor people from getting in over their heads with high-interest loans.
However, by capping the interest rates that can be charged, fintech companies and other financial institutions could not afford to cover the costs or risks of offering them, and will cease offering these options to the detriment of borrowers.
History has shown that when lawmakers stifle short-term lending, the need for credit doesn’t go away. In other states that restricted credit options, borrowers turn to even pricier avenues, including overdraft protection, bouncing personal checks, skipping bills, or underground market alternatives.
Borrowers have a responsibility to understand the terms of the loans they take and repay them. They do.
As IWFeatures storyteller, Destyni Dindy, an entrepreneur who utilized these loans as she built her personal training business, explained, “If you’re aware of what you need and only that, then I think these options are great.”
Bottom Line
We hope this effort to restrict credit options for cash-trapped Alaskans is dead thanks to Governor Dunleavy. Growing economies and cutting taxes leave more money in the paychecks of residents. At a minimum, Americans should be able to access as many options for credit when they are in a financial pinch.