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Millennial credit history may be leading to higher interest rate loans

While many consumers are taking advantage of the availability of cheap credit, millennials are often locked out of receiving the best deals due to poor credit scores. Instead, this generational group, those born after 1982, often pays a higher interest rate on loans and even takes on costly payday loans due to their credit situation.

In fact, younger borrowers are much more likely to take out expensive payday loans than those in older generations. Furthermore, millennials are also more likely use payday loans more often than the baby boomer generation. One of the reasons for this is that individuals in the millennial generation are more likely to have poor credit than older individuals are. This is due in part to the fact that millennials usually do not have a strong track record of making payments on time. The fact that millennials tend to rely on payday loans so often also creates a vicious cycle, as their use of such loans often drags down their credit scores.

Young people also often find it challenging to access traditional finance methods that would assist them in building their credit scores. With few traditional financing choices available, combined with the challenges associated with low-wage jobs, millennials are often forced to borrow out of necessity, such as with the use of alternative financing methods, like payday loans.

Not only does it cost more to borrow money using a payday loan than with traditional loans, evidence indicates that alternative forms of finance can have a detrimental effect on credit scores, which can make it more difficult to improve scores to access less expensive forms of mainstream finance.

Meanwhile, banks have attempted to attract consumers by offering increasingly longer interest-free periods. Older consumers often find it much easier to obtain approval for such offers while millennials continue to pay more for their financing.

The relative ease at which payday loans can be procured is often quite attractive for younger consumers. This is particularly true when compared to small personal loans that could be obtained from a traditional bank. For most consumers, the lack of a financial track record is often a significant detriment to obtaining such loans. Moreover, over the last decade it has become harder for students and young adults to get a credit card. Following the financial crisis, many mainstream banks found it necessary to tighten their underwriting guidelines, meaning that consumers needed to meet more stringent requirements in order to obtain financing. This made it more and more difficult for consumers to access such forms of financing. Although such guidelines have relaxed some in the intervening years, many millennials continue to find themselves locked out of the ability to qualify for bank loans.

Lenders continue to look at a range of factors when evaluating the creditworthiness of consumers. Those factors, including how long a borrower has been at a job, often count against millennials. Many younger borrowers often find themselves caught in a Catch-22 situation. If you are unable to obtain financing, it can be difficult to build a credit record, and if you don’t have a credit record, you cannot obtain financing.

For many millennials, at least part of the allure of payday loans could be due to the convenience factor. For a cash-strapped generation often in debt due to being underemployed and feeling the weight of student debts, quick access to credit and cash can be especially attractive. The flexibility offered by payday loans is often quite important to this generation. Banks generally do not offer products designed to meet the needs of individuals who require short-term credit.

By comparison, non-bank products offer fees that are much easier to understand. Rather than phrasing it as charging interest, payday loans are often marketed as only costing a one-time fee. The lack of financial literacy among many consumers in this generation only compounds the problem. An inability to perform calculations associated with interest rates and to understand risk diversification often causes many millennials to steer away from taking out mainstream loans. It’s simply much easier to understand how much a payday loan will cost.

This situation is particularly concerning, as millennials are set to comprise half of the global workforce within just the next few years.

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