A new study from EDGE examines consumer health in Illinois and Wisconsin, comparing unsecured personal installment loans in Wisconsin and Illinois and examining the differences in lending and borrowing patterns. EDGE found that less stringent regulations – like the interest rate cap in Illinois – facilitate more lending, which has yielded tangible benefits to consumers. As the EDGE study notes, the two neighboring states demonstrate similar demographics and economic characteristics with nearly identical median income after adjusting for cost of living. Yet they also demonstrate radically different approaches to consumer lending regulation.
Thus, consumers in Wisconsin – who are not faced with rate cap restrictions – exhibit higher checking and savings account balances and sustainable debt levels, with similar Payment-to-Income ratios between the two states.
Other specific key findings include:
- Increased Lending in Wisconsin: With its more relaxed regulations, Wisconsin shows a marked increase in loan activity compared to Illinois. While both states have similar demographics and income levels, 42.9 percent of Wisconsin borrowers had prior loans while just 30.4 percent of borrowers in Illinois could claim the same. This suggests Wisconsin’s absence of interest rate caps encourages lenders to provide more loans, thereby increasing consumers’ access to credit.
- Higher Checking and Savings Account Balances in Wisconsin: Because borrowers in Wisconsin benefit from increased access to credit, they also are able to maintain higher checking and savings balances. This trend is particularly noticeable at the lower and upper ends of the income spectrum, indicating that Wisconsin residents enjoy greater financial flexibility to manage unexpected expenses.
- Lower Payment Levels in Wisconsin: Even though they are borrowing more, Wisconsin consumers are not significantly increasing their financial burden. Payments in Wisconsin are only slightly higher than they are in Illinois, particularly at lower income levels where the average payment difference is $55. This suggests that Wisconsin’s flexible lending environment helps borrowers access credit without becoming overwhelmed with debt.
- Sustainable Debt Levels: Despite having more access to credit, Wisconsin borrowers are demonstrating effective debt management, as demonstrated by comparable Payment-to-Income (PTI) ratios between Wisconsin and Illinois. Because PTI ratios measure a borrower’s ability to manage debt, this reinforces the idea that more relaxed regulations do not necessarily lead to unsustainable debt levels
- Lower Bankruptcy Rates in Wisconsin: On a per capita basis, Illinois has 23 percent more bankruptcies than Wisconsin, supporting the notion that better access to credit—as is the case in Wisconsin—allows consumers to more effectively manage financial difficulties. This may also help them avoid bankruptcies altogether.
The study’s basis for analysis is bank transaction data from EDGE. The data gives a real-time view of applicants’ financial health at the time of newly funded loans, including checking and saving balances, income summaries, current loan payments and number of prior loans. Lenders use these insights as the basis for evaluating applicant’s creditworthiness. Our analysis shows that cash flow underwriting can be an effective real-time measure of borrowers’ ability to repay, an important feature to prepare for the Consumer Financial Protection Bureau’s upcoming Small Dollar Rule. Bank transaction data can give lenders the confidence to say, “Yes” to more applicants, even if credit bureau data is thin or unavailable, and it can also give lenders the ability to offer more competitive and affordable terms.
Those interested can find the full study at https://www.edgescore.com/creditunions/white-paper-cash-flow-underwriting-data.
