Helping the unbanked
Bill Clinton and Arnold Schwarzenegger are heading up a great initiative to get people to open bank accounts rather than use check cashing centers etc. that charge what is often a hefty a fee to cash their paycheck. In a commentary in the WSJ, they point out that: the number of check cashers, payday lenders and pawnshops is more than double the number of McDonald’s franchises in the United States.
More than 20 million Americans cash more than $60 billion in checks each year at check-cashing businesses. Full-time workers without a checking account typically pay $40 on average to cash their paychecks. And payday lenders sell an additional $40 billion in expensive small-dollar loans each year that carry fees 30 times the average credit-card rate.
I have long been an advocate of people joining credit unions because they often have lower fees than banks and will work harder to provide their members with services such as car loans further saving people money. Maybe with a little luck this initiative will catch on nation wide.
Tags: Arnold Schwarzenegger, banking, Bill Clinton, check cashing, payday loans, unbank
Filed under: Avoid Scams & ID Theft, Coping With Credit & Debt
Right now, payday loans are a cheaper alternative to bounced checks, and restart fees on utility bills. If a business can provide cash advances to high-risk consumers at lower rates, then those new businesses should try to compete in the market. Price fixing and usury limits do not have the intended effect of forcing legal lenders to lower their fees. Instead, legislating price caps simply forces legal lenders to stop offering loans to certain consumers.
In other words, if legislators cap the fees on short-term loans or bounced check fees, then lenders and banks simply stop offering credit to a large segment of the market. This is not a solution, as persons living paycheck to paycheck will resort to “unregulated” lenders. Prohibition failed in other arenas, driving people to unscrupulous providers, and the same occurs when legislators outlaw payday loans. Typically, when states eliminate payday lending, the consumers turn to unregulated foreign-based Internet payday lenders, as their only alternative to bounced check fees and utility restart fees.
See the following article from the Federal Reserve Board regarding How Households Fare after Payday Credit Bans, for more information: http://www.newyorkfed.org/research/staff_reports/sr309.html . It would be far better to regulate and monitor short term loans, and to find ways to encourage competition, then to simply legislate these consumers into the hands of unregulated offshore Internet lenders.
That is not the whole story, and the Federal Reserve paper you cite is not so clearly supportive of what you say. See , where you can find links to other rebuttals. Specifically, the data does not support the conclusion.
Then again, this post was not about payday loans, but about opening bank accounts instead of using check-cashing centers.
While the post was about getting people to open a bank account as Sam points out, and I really recommend that people look at becoming a member of a credit union or go to a small state bank. I agree with Sam that the Federal Reserve paper on payday loans is not as supportive of your position.
I think Payday loans are rarely cheaper than overdraft fees because the borrower doesn’t quickly repay the amount but continues to roll the loan over upward of 12 times. During this time they pay huge fees which because they don’t have any room in their income the $35+ they are paying in fees and interest every time they renew increases they chances that they will also have overdrafts during the same period. Also I think it is largely a myth that people who use payday loans are high-risk. They have to be employed and have a checking account. Both require a certain level stability.