CDF recently reviewed its lending programs and their impacts. There are some important conclusions from this review.
CDF maintains three different lending programs:
- Installment loans for larger loan amounts and longer terms. CDF’s installment loans are unsecured and average about $3,500 but have been as large as $20,000. These loans require the applicant to meet with CDF staff and undertake financial coaching.
- Zero-interest loans up to $1,000 that can be repaid in 10 months or less. These loans are made possible by a grant from Our Biswas.
- Payday loans made at 40% of the market rate, up to $300. Most of CDF’s payday borrowers have moved to the zero-interest loans since they became available in August 2020.
CDF’s lending tries to assist people who otherwise have few options to gaining access to credit. Low and very low-income people are often shut out of access to traditional sources such as banks and credit unions. Even the new fintech lenders generally have minimum requirements for credit scores and other indicators that often disqualify these potential borrowers. And, if these potential borrowers have bad credit, access becomes much more difficult.
CDF targets low and very low-income people with credit scores of roughly 400 to 600, those who often have great difficulty accessing traditional sources. In these situations, they may have no other options at all or only ones that are predatory.
These are people considered high risk and less likely to repay their loans. CDF looked at its lending to assess this assumption. We looked at our loans made between January 1, 2020 and June 30, 2022. We also have some longer-term data that were added. This time period covered a good part of the pandemic and CDF borrowing levels were somewhat lower than normal.
First, here are the demographic data for borrowers in that time period.
|Very Low or
|Installment loans||29 of 30||23||69%||97%||52||601||$55,857|
|0-interest loans||44 of 44||43||77%||93%||57||572||$33,209|
|Payday loans||58 of 58||54||70%||95%||55||584||$37,393|
Most of CDF’s borrowers are female, older, a person of color, have very low or extremely low income (as defined by HUD) and have relatively bad credit scores. They also tended to have high debt levels: $66,605, $16,736 and $26,841 respectively. The ranges were somewhat different as there also were many younger borrowers, a wide range of debt conditions and income levels, and many people with credit scores in the 400’s and low 500’s.
The repayment rates are of crucial importance. The rates, respectively, were 0%, 0.32% and 0.43% during this period. These are extraordinarily low rates, particularly for supposedly high-risk borrowers but also for any borrowers. There were times when delinquencies were high, as these borrowers lived very fragile economic lives especially during the pandemic. But they were committed to repaying their loans. These rates are even lower than CDF’s overall rates since the program’s inception: 1.09%, 0.32%, and 0.60%, respectively.
Low and very low-income borrowers will repay loans that are structured correctly and if they are working with a lender which builds trust relationships.