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

The current state of the US economy has officials nervous 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%. The dire economic crisis is leaving millions of Americans wondering whether this is an unfortunate setback until the containment of COVID-19, or if it will continue its ripple effects for years to come.

Meanwhile, as millions file for unemployment, questions center around how Americans will overcome the financial hurdles that are ahead. Consumers are dealing with a unique and multifaceted problem which includes unemployment, dwindling funds, a pandemic, devastating loss of life, shelter-in-place initiatives, and social distancing rules.

The federal government has created programs to partner with banks in order to tackle the economic crisis, but without adequate execution, business owners and consumers are finding themselves left in the dust.

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 those who are already struggling. Lower-income households, in particular, are facing more difficulty. Those receiving minimum wage, have no sick paid leave, or are unable to afford health insurance are shouldering the brunt of the health and economic crisis.

The U.S. Bureau of Labor Statistics (BLS) Consumer Expenditure Survey of 2018 found 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 effects of the pandemic economy for at least another year, leaving many vulnerable to the volatile changes taking place in both 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? 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 relief will need to make way for long-term financial strategies. Federal regulators are rolling out government programs offering homeowners forbearance on their mortgage for up to a year. Businesses are also receiving 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, hopeful consumers who had expected to get help will inevitably be 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 since many borrowers are unable to qualify for a bank loan.

Although products such as payday loans are often denounced for predatory lending practices, needy borrowers are often left with no choice and use these lenders as a resource in desperate times. When faced with unprecedented circumstances such as the current pandemic, struggling consumers may be looking to alternative lenders for solutions.

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

The problem is many of these alternative loans come at the cost of higher interest rates. Many states, however, are cracking down on lenders charging exorbitant interest rates. State regulations such as California’s AB 539 bill, which was enacted in January, reduces predatory lending by keeping interest rates at 36%. Although it's another resource for cash, consumers will 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 keep the economy from nosediving into a depression, small business owners across the nation will have to keep calm and carry on in whatever means possible. April remains a crucial month as state and federal health officials keep an eye on the development of COVID-19 in hopes of flattening the curve. In the meanwhile, the nation continues to wait for solutions and relief as each day goes by. We’re all in this together.