It is Expensive to be Poor in the US.
What do you call a shark who wants to be by himself? A lone shark.
In the United States, I find it is expensive being poor.
One out of four Americans are unbanked or under-banked according to the FDIC.
If you are a member of this special club, banking alternatives or the lender of last resort are expensive and possibly predatory (politely called subprime). How expensive is predatory lending? Check-Cashing Stores generate $1.6 billion charging their customers up to 14% fees. The pay day loan industry generates a whopping 7 billion dollars in revenue charging 300-500% interest. The car-title loan business, however heavily regulated, generates 1 billion dollars in annual revenue. The target market for predatory products include the low income, no cash, no credit score, the elderly, and minorities. The vulnerable rely on overpriced financial services that you and I may take for granted. They use these “special” services because the under-banked have no traditional banking services available to them. If the unbanked receive a check they use a check-cashing store. If the unbanked run out of money and they have a job, they can access cash from their local pay day loan store which charges up to 300% to 500% interest. Get a car title loan for $1000 and pay a low 30% interest, but risk your car to repossession. The word predatory in the description is credible, as it is common for borrowers to have a higher rate of bankruptcy because of compounding of 500% interest, illegal debt collection practices, and my favorite, automatic rollovers.
1. Check Cashing Business
If you receive a check, you will depend on a check-cashing store. These are business outlets that cash checks for a fee. Live in a location without access to Walmart or Amscot a rural customer might pay 14% of your check amount in fees.
2. Pay Day Loans
Payday loans are one of the most profitable short term lending products. Originally designed to help borrowers in an emergency, 70% of borrowers use payday loans to pay regular expenses such as rent and utilities.
75% of payday loan company revenue is earned by borrowers rolling over their loan. 80% of payday loan borrowers rollover their loan!
Online, I found a proposal in Florida, with Advance America, for a $300 loan repaid in 14 days. The finance charge for the 14 day term is $35.00. Folks, that equates to a 304% APR. Change the state to California and you pay the same interest fee for a $200 balance, which equals 460% APR. Borrowers may be charged with hidden fees, like application and customer service fees. I told you it was expensive to be poor! Online lenders get access to your personal banking information and are more likely to exploit their customers. Another troubling aspect of pay day loans is the fact that the lender asks you to write a post dated check to the lender to cover the debt and expenses. This risks the borrower with bouncing the pay day loan payment. This of course results in the pay day loan shop adding penalties, fees, and additional interest for delaying your repayment for two weeks. Not to mention you pay the overdraft fee. If you don’t have a bank account payday loan companies will simply use a prepaid debit card depositing the borrowed funds and then taking funds back automatically in two weeks.
Sadly, because over 50% of borrowers default on online payday loans, most borrowers pay more in fees than they originally borrowed in the first place! Payday loans are legal in 26 states. In fact, in a win for the consumer, Advance America ceased doing business this month in Illinois because the legislature capped interest rates at 36%.
3. Car Title Loans
Title loans use your cars value as collateral to provide same-day access to your cash. Title Loan amounts range from $2,000 to $25,000 as low as 36% interest in Ohio up to 145% in Tennessee. Don’t forget your car is collateral for the loan and subject to repossession for non-payment. If that is unacceptable, you can open a line of unsecured credit in Tennessee, for the advertised rate of 224%. Just his week, the above mentioned Advance America is partnering with Loan Center. Loan Center is a secured “car title” loan business, a wholly owned subsidiary of Westlake Capital Finance, a conglomerate that provides $12 billion of auto related financial products.
I mention this to tell you how interconnected traditional financial institutions and multi-national companies are to predatory lending. Advance America mentioned above is owned by the Mexican publicly traded company Grupo Elektra.
Alternatives to Predatory Lending.
· Get help to manage debt
· Use Walmart to cash a check at a reasonable price.
· If someone is facing a money crisis, it would make sense to sell items you no longer need on Facebook marketplace or Craig’s list.
· Ask your employer for a cash advance. Mention Walmart’s Even app.
· The fees, while high, are much better on a credit card cash advance.
· Talk to your community credit union about a small loan or refinancing your car.
· Ask your church to assist with emergency expenses.