Predatory Lending

People who don't have bank accounts (and even some who do) pay exorbitant premiums when they access their money through check cashing, payday loans, and cash advances.

Check cashing

Say you just did 10 hours of yardwork for someone and she gives you a $100 check. You don't have a bank account and you need the money now, so you bring it to a check-cashing place and pay a 5% fee to get cash. Basically, you spent 30 minutes working to earn the $5 that will give you access to the other $95.

Payday loans and cash advances

The Center for Responsible Lending has an excellent glossary, which explains that a payday loan is "marketed as a cash advance on the borrower's next paycheck. The terms are typically as follows: a loan amount of about $300, a two-week term, and a fee of at least $15 per $100 borrowed, which amounts to an annual percentage rate of about 400%. The borrower's personal check or debit authorization is held as collateral. Most payday borrowers get caught in a debt trap, unable to pay off the loan in the two-week term, and so are compelled to avoid default by paying repeated high fees for no new money."

(source: wikipedia)

According to DeNeen Brown (below), the DC government passed a law capping the annual percentage rates of these loans at 24%, so many of these establishments have closed or relocated.  Sure, predatory lender will find other ways, but this is a solid move in the right direction.  Check out your state's restrictions on payday loans.

Why don't people just get bank accounts? In short, because not having bank accounts gives them the feeling of more control over their money. People who have been slammed with minimum balance fees and overdraft fees at banks may feel like money in a bank is always disappearing. When they use check cashing, at least they know the exact fee that will be assessed. Perhaps language is a barrier, or lack of documentation. The Patriot Act requires proof of address, like a utility bill, which is hard to get if you're subletting or living in any other informal arrangement.

Below are two articles that explore how these predatory lending "services" work in practice.

"Living without a bank: Fees and confusion galore" Candace Choi, Oct. 3, 2010

A reporter in NYC abandons her credit and debit cards for a month to see how difficult it is to access her own money without banking services. She accumulates $93 in fees during the month by using prepaid cards, check cashing, and money orders.

"The High Cost of Poverty: Why the Poor Pay More" DeNeen L. Brown, May 18, 2009

"The poorer you are, the more things cost. More in money, time, hassle, exhaustion, menace." This article looks at high-priced food stores in low-income areas, check cashing and payday loan services, and substituting time for money.

My answer to this problem is to get people accounts at credit unions.   When we the Cheapions were volunteering at an Earned Income Tax Clinic in DC, people without bank accounts considered taking their tax refunds to check cashing places which could potentially eat up hundreds of dollars.  Generally, we told them to find a credit union and sign up for a basic, free checking account with no minimum balance.  Credit unions are not always secret clubs.  I use the NIH Federal Credit Union, which has limited eligibility, but Laura uses Philadelphia Federal Credit Union, which is open to anyone who lives, works, worships, or studies in Philadelphia.

Anyway, predatory lending is bad and traps people in a cycle of debt.  Credit unions are fabulous.