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Lending Club: Millennials’ Quest For Financial Freedom Hindered Is Being By Bad Debt, BNPL

With new PYMNTS data showing 60 percent of U.S. millennials currently living paycheck to paycheck, it could be argued that this oft-analyzed demographic is badly in need of some financial planning and education.

While the findings in the new Reality Check: The Paycheck-To-Paycheck Report bode well for the financial literacy efforts of firms like LendingClub, the current lack of savings and disposable income that these 30-somethings live with is going to be a crimp on consumption as they enter their peak spending years of housing, kids and educational expenses.

“There’s this misconception in the media that millennials are being lazy and sponging off of their parents, but it’s untrue,” LendingClub‘s Financial Health Officer Anuj Nayar told PYMNTS. “It’s super out-of-date, because millennials are, in fact, now the largest working cohort in the U.S., with the oldest members of that generation turning 40 this year.”

Read more: New Report: 54 Pct Of US Adult Consumers Feel Mired In Paycheck-To-Paycheck Living

In addition, he said, having come of age and entered the job market during the Great Recession in 2008, millennials’ financial picture has also been worsened by stagnant wages and sharply rising costs. And while some might see new credit and financing options such as buy now, pay later (BNPL) as a welcome relief for this strapped generation, that availability has also complicated things.

For example, while the fast-growing and popular BNPL products can be helpful in some cases — especially among Generation Z consumers and younger millennials, who tend to eschew credit cards — Nayar warned that they’re not suitable for everyone or all situations, and carry risks that are often misunderstood.

Nayar said millennials and consumers of all ages need to understand that the reason merchants love BNPL products so much is that they encourage consumers to spend more money.

“It’s coming out that a lot of people don’t realize that if they miss a [BNPL] payment, if they’re late, the charges rack up just like any other credit product,” he said. Allowing people to pay for a purchase with interest-free installments is fine, but it still entails taking on debt.

Besides the millennial findings, the study also revealed geographic nuances that vary by region. Some parts of the country have it tougher than others. For instance, three-quarters of consumers living in the south-central U.S. who earn less than $50,000 per year struggle from paycheck to paycheck. Nayar attributed that alarming figure to local conditions — notably, the stagnant wages, the level of unemployment and also some recent, severe weather events such as hurricanes and electrical storms that are ravaging parts of the region.

More like this: LendingClub Q2 Loan Originations Soar By 84 Pct

Nayar hopes the study will prompt the financial industry to think more about what it can do to help Americans get out of this cycle and start building a cushion for savings again. He warned that if nothing is done, it will become a major issue in the next 10 years or so.

While additional borrowing by households that are already stretched to the limit might seem like a questionable solution, Nayar said it’s important to differentiate between good debt and bad debt — as well as the need to educate consumers on the difference. For example, even as credit cards are a fast, common and easy fix to emergency funding problems, they can quickly backfire because of the high interest charged on missed payments.

“If you don’t pay it off every month, basically what you have taken on is a loan — just a really, really bad one,” he noted.

So the opportunity is to steer people away from taking on bad loans, Nayar explained. With the acquisition of Radius Bancorp last February, LendingClub can now offer a full suite of financial services that can be much more advantageous than a traditional credit card, he said.

You might also like: LendingClub Gets OK To Acquire Radius Bancorp

“If you move your credit card debt to a personal loan with LendingClub, you’re going to save money,” he said. “You’re going to set yourself a time period to get out of debt.”

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