Study Reveals Two-Fifths of Unbanked Adults Use Payday Loans or Alternative Financial Services

Inside Subprime: May 27, 2019

By Lindsay Frankel

While the majority of Americans feel that they are financially secure, 27 percent would need to borrow money or sell their belongings to cover a $400 emergency expense, according to a new study released by the Federal Reserve. And 12 percent of adults said they wouldn’t be able to afford the expense at all.

While the “Report on the Economic Well-Being of U.S. Households in 2018” reveals gains in financial stability, the improving economy has done “little to narrow the persistent economic disparities by race, education, and geography.” Nearly 80 percent of whites reported doing “okay” or “living comfortably” with regards to their finances, compared to only two-thirds of blacks and Hispanics.

Additionally, unbanked and underbanked rates were higher among minorities, leading more minorities to use alternative financial services. 14 percent of blacks and 11 percent of Hispanics didn’t have access to a bank account when compared to only four percent of whites. And people who were unbanked or underbanked were also more likely to have less education and income; 14 percent of Americans with incomes under $40,000 lacked a bank account, while only one percent of adults earning more than that were unbanked.

This was concerning because unbanked and underbanked Americans are more likely to rely on alternative financial services like payday loans, which drain even more income from people who are already experiencing financial hardship. Two-fifths of unbanked adults turned to alternative financial services in 2018, such as check cashing, auto title loans, or payday loans. Minorities were also less confident in their ability to access traditional forms of borrowing, such as getting approved for a credit card, than whites. Payday lenders are known to target low-income minorities who have few alternatives available to them. And because they charge an average APR of almost 400 percent, many borrowers fall into a debt trap that can be difficult to overcome.

And even people without current debts aren’t saving enough for the future. Though 75 percent of adults reported doing “okay” or better financially, only 36 percent believed they were putting enough away for retirement. And many Americans would also be burdened by an emergency expense; only 61 percent would be able to afford a $400 expense without borrowing.

Unexpected medical expenses plagued one-fifth of Americans in the past year, and one quarter of adults reported missing needed medical care due to the cost. 12 percent of adults said they wouldn’t be able to cover their current month’s bills if faced with an emergency expense, and another 17 percent said they would have trouble paying off their current month’s bills even if everything went as planned.

According to the Fed, the intent of the study was to gain understanding of the factors influencing financial vulnerability across the nation.

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