We are still experiencing the impact of COVID-19, but low-income families are bearing the brunt of the economic fallout. This week, Prosperity Now released a report that examines the financial struggles of low-income households during the pandemic. The findings show that many low-income households of color are using credit products such as credit cards and dangerous payday loans to navigate financial hardships. Our research has made one thing crystal clear: families struggling to get by are barely keeping their heads above water and remain stuck in a cycle of financial insecurity.  

COVID-19 & Debt: Top Reasons Families Are Struggling 

Prosperity Now conducted in-depth interviews with people working to make ends meet in order to get a full picture of the financial challenges families are facing and how they’re navigating them. This week, we released our report that laid out the top reasons why folks are struggling since the global pandemic hit:  

1. Insufficient income, often marked by job loss: Some of the top financial hardships for participants were insufficient income, an increase in household expenses and car damage/repair. For a majority of participants, insufficient income was caused by a job loss, reduction in employment hours, or a family member losing a job. 

2. Increase in expenses, including car damage and repair: Financial hardships experienced during the pandemic were exacerbated by mounting student loan and auto loan debt that was taken on prior to the pandemic. Participants reported the rising cost of food and remote schooling contributing to their financial hardships.      

3. Difficulty managing debt and accessing credit: Barriers to credit include a low credit score, a gap in information, high interest rates and unfair terms. Low-income households have limited options when it comes to gaining additional credit and rely on credit cards or friends/family loans. 

Lack of income contributed to many people taking on debt. As one participant in Kentucky described:   

“My checking account has been overdrawn several different times, and I had an overdraft fee to pay just because I didn’t have the funds to cover the payment going through or to cover the gas that I needed to put in my car at the time due to my lack of income.” 

To make matters worse, folks we interviewed often didn’t have savings to rely on for the unexpected hardships created by the pandemic, or if they did, they were depleted quickly. Several participants also noted that going into the pandemic they often struggled to pay their existing debts, which negatively impacted their credit scores and made it even more challenging to access safe and affordable credit options.  

COVID-19 & Credit: How People Made Ends Meet  

Our research found that people used several types of credit during the pandemic to navigate their financial hardships. More than half of participants used both formal and informal financial products like credit cards or friends/family loans to make ends meet. On top of this new debt, many participants also detailed how they had taken out car loans or student loans before the pandemic and found themselves struggling to keep up with payments. 

People used credit cards and friends/family loans to cover emergency household expenses since their income no longer covered their basic expenses. Many turned to informal loans such as friends/family and pawnshop loans because they were easily accessible, and they felt that they had no other option. One interviewee in Los Angeles shared:  

“I didn’t have those options of going to some place that would give me a loan. Nobody’s going to give me a loan when I was not working. Nobody’s going to give me a loan when my credit is in the state it’s in. There was no other option but to go to a personal family or friend.” 

Friends/Family Were a Crucial Form of Support 

Participants also mentioned turning to families and friends because they expected to get more flexible repayment terms. The majority also noted that they did not owe additional interest when they borrowed from friends or family, only the original amount. For example, one person in Kentucky stated:  

“I’m penny-pinching. That’s why I went to my family because we try our best to help when we can, and I would rather that than ruining what little credit I have”. 

This concern about barriers to accessing credit was common. Many participants noted that they faced challenges with accessing formal credit products because of their low credit scores. These low scores could be caused by participants finding product terms to be challenging or that their financial circumstances changed and they were unable to repay a loan. Some participants mentioned not fully understanding the relationship between interest rates and monthly payments. They were shocked when they noticed that while they were making significant monthly payments, the loan principal was only receiving a small amount since a large portion of that payment was going to interest. A few participants also reported avoiding credit or formal loans altogether because of high interest rates, unclear terms or previous credit denials. One participant from Kentucky shared why the opted for an informal loan instead of one from a bank: 

 “I tried to do that, and those give hard inquiries. So, after the – about the second or third time, you really don’t want to keep trying. So, I already knew because I wasn’t working that a loan was going to be tough because then there really wouldn’t have been a way I would have been able to pay $1,000, $2,000 back. I didn’t bother to try it. That’s the truth. I knew that it was going to be a no because of the hard inquiries that I had had previously.” 

Many low-income households did not have the financial resources or savings to navigate the tremendous financial shock created by COVID-19. As a result, our preliminary findings demonstrate how low-income households turned to credit cards, friends/family loans and other informal loans to access additional resources. In our full report, you can read a more in-depth analysis of our interviews, with additional findings including how participants leveraged support from community-based organizations. The dire reality families face calls for change – and in the report, we discuss strategies for programs and policymakers to help address these challenges.