Nonprofit Steers Consumers Away from Baltimore Payday Loans
Inside Subprime: April 15, 2019
By Lindsey Frankel
One in five households in the Baltimore area uses payday loans and check cashing services instead of holding a traditional bank account, and a local nonprofit organization is working to steer low-income residents away from these alternative financial services.
The CASH Campaign of Maryland is on a mission to help people achieve financial security by helping them establish accounts at reputable credit unions and banks. The goal is to minimize debt, increase credit scores, and help people get lower-interest loans in order to purchase a car or home. The nonprofit is offering free help filing tax returns to thousands of people in the area in order to help people make the most out of their returns by using the money to open a new bank account or purchase savings bonds.
According to a 2017 survey conducted by the Federal Deposit Insurance Corporation, around 14 million U.S. adults do not have a bank account and another 50 million rely on other services such as check cashing or payday loans. Low-income people of color account for a large portion of the unbanked and underbanked population. In the Baltimore metropolitan area, about 2 percent of households are unbanked and 19 percent are underbanked. While that’s an improvement from previous surveys, many residents are still vulnerable to paying the predatory fees and interest rates associated with alternative financial services.
Most people (52.7 percent) cite not having sufficient funds as a reason why they lack a bank account, and 34 percent say it’s the main reason, according to a February survey conducted by Next Gen Personal Finance. Many people also perceive banks as untrustworthy, have privacy concerns, or worry about the fees associated with maintaining an account.
Though low-income residents may worry that they don’t have enough money to maintain a checking account, research from the Brookings Institute shows that using check cashing services instead is much more costly. A full-time worker could save as much as $40,000 over the course of a career by using a checking account instead of relying on check cashing services. Payday loan firms and check cashers drain hard-earned income from people who are already financially fragile.
For some people, past financial issues can get in the way of opening a new checking or savings account. Banks can flag customers using ChexSystems, a consumer reporting agency, if they’ve defaulted on fees, bounced too many checks, or shown other risky behaviors. But some banks offer “second chance” accounts that give people the opportunity to show patterns of financial responsibility, according to Kathleen Murphy, president of the Maryland Bankers Association. She said banks also focus on educational efforts to help improve financial literacy and decrease the number of unbanked and underbanked residents in Maryland.