How are consumers and banks handling loans in the age of COVID-19?

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The current state of the American economy has everyone on the edge as unemployment hits record numbers. The New York Times reports that the number of jobless claims has reached 16 million, while Fortune magazine reports it is likely that unemployment rates are at 14.7%and not at the official rate of 4.4%. This dire economic state is leaving millions of Americans wondering whether or not these changes will be a long setback until the adequate containment of COVID-19, or if this crisis will continue for years to come. In the meanwhile, as millions file for unemployment, the question centers around how Americans will overcome the financial hurdles that are ahead.

American consumers are dealing with a unique and multifaceted problem which includes unemployment, a war on health, devastating loss of life, and shelter-in-place and social distancing objectives. The federal government has created programs to partner with banks in order to tackle the crisis, but without adequate execution, business owners and consumers are finding themselves left in the dust.

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Alternative Lenders Needed: Stimulus Checks Can Only Do So Much

The federal government’s solution to the pandemic’s economic impact includes a stimulus package of $1,200 to taxpayers. Although it’s a small bandaid on a bleeding economy, it may help some households afford rent and food for another month. Many are arguing, however, that these long-awaited stimulus checks will barely make a dent for struggling lower-income households, especially those receiving minimum wage, have no sick paid leave, or are unable to afford health insurance. The U.S. Bureau of Labor Statistics (BLS) Consumer Expenditure Survey of 2018found that the average American spends about $1,674 on housing every month.

According to the data, housing expenses typically make up 33% of a consumer unit’s expenses each month. These consumer units can include financially independent families and individuals living alone or in coliving spaces with others. In addition, almost 30% of Americans have no savings account or emergency fund of at least $1,000. Experts predict that Americans will continue to experience negative effects of the pandemic’s reach into the economy for at least another year, leaving many vulnerable to the volatile changes taking place in the economic and political landscape.

Loans in the Time of COVID-19

With borrowers desperate for cash loans, banks and lenders are considering how to responsibly underwrite and disburse loans to vulnerable consumers in a fragile economy. Many questions remain unanswered as the pandemic continues. How big of a role will credit scores play in future eligibility requirements? Delayed payments will affect credit reporting but will credit bureaus offer support for struggling Americans during this hour of great need? And how much help is appropriate? Lower-income communities will face more risks than those with higher income and lenders will need to accommodate the needs of both groups. Consumers and lenders will be confronting these questions in the next year and will need to contend for solutions that will benefit each party.

Banks Are Overwhelmed

With stimulus checks expected to reach households by mid-April, short-term solutions for temporary relief will make way for strategies to determine long-term solutions. Federal regulators are rolling out government programs that offer homeowners forbearance on their mortgage for up to a year. Businesses are also getting some relief through stimulus loans from the Small Business Administration.

However, with the sudden influx of loan applications, lenders and banks are overwhelmed by the massive demand for cash flow. Many banks are being cautious and are tightening eligibility standards to avoid risky borrowers and defaulting loans. Banks are also lagging behind in disbursing loans to small businesses. Business Insider recently quoted Mark Cuban on the issue, "Banks are playing themselves," Cuban said. "They're being banks, and they're trying to determine if the credits are good, and that's leading to a lot of small businesses that are left out in the cold." In a time when many businesses are facing financial crises, is it appropriate to continue stringent credit checks?

Unfortunately, the resulting consequence will be that hopeful consumers who had expected to get help will inevitably be marginalized and pushed aside as banks deny lower-credit consumers. Without anywhere to go, consumers will be left with less-than-perfect options such as alternative lenders and collateral loans.

Will Alternative Lenders Fill a Need?

Alternative lending, a large category which includes peer-to-peer loans, crowdfunding, payday loans, car title loans, merchant cash advances, and others are often viewed as a necessary piece in the finance industry because many consumers are unable to qualify for a loan with traditional banks. Although products such as payday loans are often denounced for predatory lending practices, many consumers are often left with no choice and understandably view these lenders as a resource in desperate times. When faced with unprecedented circumstances such as the current pandemic, alternative lenders may be part of the solution for struggling Americans.

Companies such as Paypal, Square, and Intuit are offering business loans to small businesses for economic relief. After weeks of lobbying, these companies have been approved to offer business loans to provide assistance to business owners. Congress has approved a $2 trillion stimulus plan to assist businesses in these difficult times, but the process of disbursement has been lackluster and inefficient. Business owners are counting down the days until relief comes as they bleed cash, but some may not make it. It’s in these desperate times that hard money loans or merchant cash advances may be on the rise.

The only problem is, many of these alternative lending opportunities come at a cost to consumers because of higher interest rates. However, many states are cracking down on lenders charging exorbitant interest rates. State regulations such as California’s AB 539 bill, which was enacted earlier this year in January, reduce predatory lending by keeping interest rates at 36%. But in many cases, borrowers will still need to be careful when taking out a loan with alternative lenders because of the risk of defaulting during a volatile economic period.

Stay Calm and Carry On

As federal officials scramble to find ways to keep the economy from a depression, small business owners across the nation will have to keep calm and carry on in whatever way possible. April remains a crucial month as state and federal health officials keep an eye out for the peak of the virus and the possibility of flattening the curve. In the meanwhile, consumers across the nation continue to wait for solutions and relief as each day goes by. We’re all in this together.