Are Alternative Financial Services Better Than Too Expensive Traditional Banks?

The time has come for policymakers and payday loan critics to get to know those who use these alternative financial services.  That’s what Lisa Servon, a professor of urban policy at the New School in New York, did and she learned a lot about why these services are in demand.

She recently detailed her experience in The New York Times in “Are Banks Too Expensive to Use?” (http://www.nytimes.com/2014/10/30/opinion/are-banks-too-expensive-to-use.html) In it, she reflects on her experience as a clerk at a couple of check cashing businesses. During her work there, she rubbed shoulders with the so-called “unbanked” and discovered why they use alternative financial services.

Who Are the Unbanked?

The unbanked are those who don’t use traditional banks. As of 2013, 25 million Americans were unbanked, meaning they had no bank account at all according to a recent report by the Federal Deposit Insurance Corporation (FDIC). Another 68 million were “underbanked.” Instead of using traditional banks, both groups used check-cashing centers, payday lenders, and fee-based prepaid debit cards to carry out their financial affairs.

Why Many Are Unbanked?

Here’s what Servon realized about why the unbanked or underbanked preferred this non-banking system to mainstream banks. They described banks as “more expensive and confusing and less service-oriented” than the alternatives. Many had grown tired of the increasing fees charged by banks.

Banks Getting More Expensive

Servon notes that — on average — the banks’ monthly service fees on checking accounts jumped 25 percent in from 2010 to 2011. From 2009 to 2011, the percent of free noninterest-bearing checking accounts also declined from 76 percent to 39 percent. The average overdraft fee also rose to $32.74.

It’s funny that payday loans seem to get all the criticism, but as recent studies have shown overdraft fees are much higher. If you consider the amount of the overdraft as a short-term loan and the fee as the interest, overdrafts can have an annual percentage rate (A.P.R.) of 5,000 percent.

This dwarfs the 200 to 500 percent A.P.R. of a 14-day payday loan, which runs 200 to 500 percent. Unfortunately many of those hardest hit by these fees don’t realize it because hardly anyone criticizes or threatens to shutdown the mainstream banks that profit from overdraft fees.

Why Alternatives Make Sense

Check cashers also charge a percentage of the face value of a check when cashing it. This fee can vary depending on the state, but usually runs at least two percent. Money order fees also vary, but many check cashing services charge less than the post office for the service.

Most banks no longer offer free savings accounts – even for minors. Plus, it is not uncommon to hear a horror story of how someone opened a savings account to teach their kids to save, checked the banking statement after the first few months and realized the kid had lost not saved any money.

Why? The bank subtracted $5 or $10 a month as a service fees. Unknowingly, the child’s original deposit had declined by $15 to $30 dollars. The lesson learned? Banks charge too much for their services.

In fact, mainstream banking costs are rising so high that even organizations that used to try and move the unbanked to the traditional banks are changing their policies. They’ve seen firsthand the damage these types of fees cause to their clients.

What do they recommend now? Believe it or not — check cashing centers.

More Choice Equals Better and Less Expensive Financial Services

What’s next for alternative financial services?

Alternative lenders and check cashers are already starting to innovate and improve products and services. Their offerings are becoming better and less expensive.

Not only do they compete with each other, but they also compete with the banks. In the end, this is good for consumers – whether they are unbanked, under banked or banked.

The key to succeeding in the financial marketplace is giving consumers options that they want and need. The demand for payday loans and check-cashing services indicates that it’s a necessary service for those who can’t get low-rate personal loans or free checking and savings accounts from traditional banks.

The Takeaway

As Servon asks in her Op-Ed piece: “Does using a bank really contribute to financial health?”  She concludes that “for an increasing number of people, the answer is no.”

All those who would answer no to that question, deserve alternatives. That’s why it’s necessary to protect options like payday loans, cash advances and other kinds of personal loans.

Instead of focusing on outlawing alternatives, policy makers should focus on improving the alternatives. Alternatives lenders should too.

And they are. That’s why there’s a huge amount of innovation happening in the lending marketplace – from lending clubs, peer-to-peer loans, and crowd funding. Plus, alternative lenders have also created payday loans and cash advances with more manageable payback periods and lower-rates.

Your best course of action is to use competition to your advantage. An online loan matching services enables you to do just that. You can apply to many different lenders at one time and since they are competing for your business, between you are more likely to find loans with the best rates and terms.

How to Make Cash Advance Loans Work for You

We all know someone who has gone through economic difficulties in the past decade. In fact, most of us have. And that financial reality has made us all consider new, untried financial tools.

One of those tools is the cash advance loan. These loans are a viable financial option when you need cash quickly for any unforeseen crisis. Unfortunately, this financial tool, more than others, has received an unfair reputation. Many consider it a last chance loan for the financially desperate…a path that will take a consumer into deeper and deeper debt. But that reputation is unfair.

All Financial Tool Options Have Limitations

In truth, any financial tool can be misused, and all plans have their pitfalls. Take a look back at the last decade and consider this common scenario. Someone was laid off from a job, or their salary was reduced. The paychecks stopped, but the bills didn’t. Credit from banks dried up, and as a result, people often defaulted on their mortgages or other personal loans. To pay bills, they maxed out their credit cards or borrowed money from family, often fraying relations when the money couldn’t be paid back.

None of these scenarios is the fault of the financial tool. It was just a matter of the user getting caught in an economic reality that offered few options. The same could be said about cash advance loans. Certainly there are those who have misused these loans, or who turned to them as a means to get through hard times and then couldn’t pull themselves out of it. But if used correctly, these loans are an excellent option for coming up with needed cash, quickly.

Use the Payday Loan Correctly

The most important thing to remember is that quick cash loans are intended for smaller amounts of money that can be paid back quickly. They are excellent tools for those small financial emergencies that pop up in everyone’s lives—unexpected medical expenses, car repairs, or back to school shopping for your kids. These are all unbudgeted items that occur in a normal life. If you’re caught short of cash, this type of loan is a great solution for paying your bills with very little hassle.

Simply find a cash advance lender and apply for a loan—usually this involves filling out a short application and providing proof of employment and a bank account. Most lenders can give you an approval within two hours, and the loan amount can be directly deposited into your account within one business day. The Internet has made this process even easier. You can search online for quick cash lenders, compare rates, fees and options, and apply online without ever having to leave your home. When you arrange to have money deposited into your account, you can also schedule an automatic withdrawal from your bank account on the day the loan is due. This way you never default on the loan, thereby avoiding late fees and higher interest rates.

A Short-term Debt with Big Benefits

Quick cash loans allow you to avoid long payment commitments. Borrow only as much as you need, and arrange to pay it back as soon as you can, ideally within one pay period. You can meet your financial obligations, and get yourself out of debt quickly. If you have a financial emergency but find yourself short of cash, a payday loan may be the answer you are looking for.

 

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Fact vs. Fiction—The Truth About Payday Loans

As consumers continue to research alternative options in uncertain economic times, it’s inevitable that the myths about some financial tools will be disproved. The myths about payday loans are among these. Cash advance loans are often disparaged as a “last resort” in economic hard times. But in reality, they are an excellent solution for covering any unexpected expense. And let’s face it, financial emergencies happen in both good and bad times. Take a look at the five common questions about quick cash loans listed below. Arm yourself with the facts, and decide for yourself if a paycheck advance loan is the right financial tool for you.

Aren’t Cash Advance Loans for those who don’t qualify for any other type of loan?

Not necessarily. While it is true that these loans are available to those with bad credit, or no credit at all––those who might be denied a conventional loan or credit card offer––it is also a viable financial tool for those with perfect credit.

A paycheck advance loan is designed for small amounts of cash that can be repaid quickly. So anyone facing a short-term cash flow shortage could take advantage of a quick cash loan to get them through a financial tough spot.

Won’t applying for a Cash Advance Loan ruin my credit rating?

Applying for a quick cash loan will NOT ruin your credit rating. Cash advance lenders do not conduct credit searches, so applying for a loan will have not bearing on your rating. On the contrary, if you do have a damaged credit rating, applying for and paying off your quick-cash loan on time and according to the terms will help improve your overall credit history.

Don’t these loans come with high interest rates and hidden fees?

It’s true that these loans come with high interest rates. The nature of the loan requires this. Remember, your lender is not doing a credit search on you, nor is it requiring any collateral. They are taking a risk in lending you money without a thorough knowledge of your financial history. Higher risk equals higher rates. Also, because these loans are for short periods of time, the lender must make its money on your loan quickly, so higher interest rates are charged.

As far as “hidden” fees, it is your obligation as a consumer to read the contract you are signing. A lender has the right to charge you late fees or additional finance fees if you renew the loan. They should not, however, tack on extra, superfluous fees that have nothing to with the money you are borrowing. If you are not sure about the wording in a contract, ask questions. If you are not satisfied with the answers you receive, move on to a different lender.

Interest rates and fees vary by lender, so it is important that you read through your loan agreement thoroughly and that you understand all the terms you are obligated to fulfill.

Don’t people go into more and deeper debt when they start using these types of loans?

If used properly, you will be able to borrow the money you need, and pay it back within one or two pay periods. As long as you pay the loan back on time, you will not face additional fees, and should not incur any additional debt.

As with any other type of loan or line of credit, additional fees will apply if you pay late, or don’t pay the entire amount due on time. Doing so will result in additional fees and higher interest rates that could impair your ability to pay back the loan. These financial practices will get you deeper into debt, but the same can be said about a conventional loan or a credit card.

Isn’t the application process intrusive?

Not at all. In fact, a payday loan is one of the easiest types of loans to apply for. You will not be subjected to a credit check, nor will you be required to provide collateral. The only requirements are that you are employed and have a bank account.

When you apply, you’ll be asked to complete a short application form, to provide proof of employment, as well as a personal bank account number. If you can provide these, you are almost assured of being approved for a quick cash loan. As an added convenience, you get to do all of this from the comfort of your own home.

 

Why Should You Choose a Cash Advance Loan

In a perfect world we would make as much money as we needed, and always be able to pay our bills. But life doesn’t work like that. People lose their jobs, they need unexpected medical treatments, or their car breaks down and needs to be repaired. These types of financial emergencies are common in almost all of our lives, and a cash advance loan is a viable tool in getting through these temporary crises.

The economic realities of the past few years have helped us all rethink our view on the financial options available to us. As the recession deepened and the housing market collapsed, people saw their traditional sources of credit dry up. For the first time, many consumers were considering the merits of a payday loan.

Great Solutions for Short-Term Problems

Payday loans are a convenient solution for short-term cash emergencies. They are intended to provide small amounts of cash, quickly. In turn, they are designed to be repaid in a short period of time, avoiding the obligations and fees associated with borrowing money for lengthier commitments.

Applying for a quick cash loan is easy. If you prefer, you can visit a local lender and apply in person. Or, you can apply online, which offers several advantages. The paycheck advance lending industry has become very competitive, and searching online allows you to compare multiple lenders for better rates.

The only real requirements for approval are proof of employment and a bank account. You will be asked:

• To complete a short application

• Provide your social security number

• Provide the name and phone number of your employer

• Provide the routing number of your bank and your personal account number.

You will know within a few hours if you are approved, and the money will be available to you usually within 24 hours.

Technology is Your Friend

Cash advance loans are intended to be short-term, and you should arrange to pay the money back as soon as possible. Doing so gets you out of debt quickly, and minimizes the amount of money you pay in interest and financing fees. This is where modern technology can help you out.

Just as your loan can be directly deposited into your account, you can also arrange to have it repaid through an automatic withdrawal on your next payday. Doing so ensures that you make payment on time, and that the money you borrowed will be repaid before you forget and spend it on something else. If you need more than one pay period to repay the loan, arrange this with your lender when you are going through the approval process. Doing so will help you avoid unnecessary financing charges and late fees.

Improve Your Credit Score

You may be applying for a quick cash loan to get you through a one-time emergency…either because you don’t want to put anything else on your credit card, or borrow money from family. You may also be seeking a quick-cash loan solution because you would be denied other forms of credit do to a damaged credit history.

If your credit score is less than perfect, but you still find yourself in need of emergency cash, a payday loan could help you rebuild your credit. If you borrow money through a paycheck advance loan, repay it on time, and meet all the conditions of your loan, your credit score will improve. Overtime, you will likely find that you qualify for other forms of credit.

 

How Can Payday Lenders Charge Such High Interest Rates?

If there’s one criticism of cash advance loans that you always hear about, it’s that they come with high interest rates. There’s no denying that fact. But if you understand how interest rates work, and how payday loans are designed to be used, you begin to see how higher rates can be justified.

How Interest Rates Work

When you borrow money–whether from a bank, a cash advance lender, or a friend—someone is taking a chance on you. They lend you money with the understanding that you will pay it back. If you don’t, they lose their money. That’s a risk that all lenders take. To compensate for that risk, banks and other lenders will charge you a fee—the interest rate—for the length of the loan. With conventional bank loans, your interest rate is tied to your credit rating. The better your score, the lower your interest rate. Longer loans also come with lower rates since the lender knows they will be earning money on your loan for several months or years.

How Payday Loans Work

The nature of a quick cash loan is part of the reason interest rates are higher. These loans are designed to provide emergency funds, so approval has to be quick. To do this, quick cash lenders do not conduct credit checks, nor do they require collateral for your loan. This means the lender has less security, since they do not have all the facts of your financial responsibility. And the truth is that these types of loans have the highest default rate in the financial industry. The higher risk factor means higher rates. Plus, the short turnaround of a quick cash loan means the lender must make their money on the loan in a short period of time, since you are only paying interest for a matter of days or weeks.

Minimize Fees by Using Quick Cash Loans Correctly

As long as you use the payday loan properly, you shouldn’t be adversely affected by the higher rates. First, always comparison shop. Cash advance lending is now a very competitive business, and the Internet allows you to do a lot of online research to find those businesses offering good rates and payment plans.

Second, never borrow more than you need. The more money you borrow, the higher your fees. Repay the loan back as soon as possible to keep your rates down, preferably your next payday. This means looking ahead, considering your upcoming expenses, and budgeting accordingly.

Finally, pay back what you owe on time. Doing so helps you avoid late fees and ongoing high interest charges. Your interest rates will most likely be shown as an upfront flat fee, the amount of which is tied into the amount you are borrowing. That fee, as with any other loan, is included in your payment. As long as you pay on time, you will not be charged any additional fees. Just consider this the cost of doing business. As long as you meet your end of the bargain, you won’t be charged additional fees.

 

Who Qualifies for a Cash Advance Loan?

A payday loan is the easiest type of loan you can apply for. There is no credit check involved, so even if you have bad credit, you won’t be denied. There is also no collateral required, so you don’t need to be a homeowner, or even own a car. The two main qualifications you need are a steady job and a bank account. If you can provide proof of those, you will likely qualify.

Understanding the Process

Cash advance lenders are there to provide you with quick, emergency cash when you most need it. This is a financial tool for small amounts of money that can be paid back quickly. When you apply, you will need to bring a personal ID (driver’s license), your social security number, at least two paystubs, and two bank account statements. A paystub is proof of your employment, and a bank account shows your stability and intent to repay. If you apply online, the process is even simpler. You provide your employer’s name and phone number, and your bank routing number and personal account number. The lender will verify this information without all the paperwork.

The process itself is pretty simple…fill out an application, provide the requested information, and read through and sign the contract…when you’re approved the money can usually be deposited directly into your bank account, ready for you to use.

After you’ve figured out what lender to use and how to apply, the next question you should ask yourself is, “How much should I borrow?”

How Much Will You Qualify For?

Payday loans are usually based on salary, and many lenders will lend you up to the amount of one paycheck. But what you qualify for, and what you should borrow, are two different things.

As a rule, you should never borrow more than you absolutely need. Let’s say your furnace broke down in the middle of winter. It will cost $400 to repair. If you need $400, only borrow $400. Don’t tack on another $100 so you can take the family out to eat at a nice restaurant. Remember, everything you borrow has to be repaid. And because quick cash loans come with higher interest rates, you want to be able to pay it back as quickly as you can. Also, you will be charged interest rate fees on the amount of money you borrow. The higher the amount, the higher the fees.

Always Work Within Your Budget

The cash advance loan is a tool to help you get through short-term financial shortages. But even in a financial crisis, you need to remember what your ongoing expenses are. Consider our furnace example above: you need to borrow $400. Let’s say the cost of borrowing that money is $80 over a two-week period, bringing your loan total to $480. You should know what your household expenses are for the month, and whether or not your next paycheck can both pay those expenses plus absorb the full amount of your payday loan. If it can’t, you will be in the same situation a month from now…with unpaid expenses and not enough money to pay them.

So be honest with yourself. You don’t want to get in a cycle of taking out loan after loan just to pay ordinary monthly expenses. That’s an expensive way to finance your lifestyle. If you know you cannot absorb an additional $480 in one pay period, arrange with your lender to pay it off over multiple pay periods. Your interest rate fees will be higher, but it is still cheaper then defaulting on a loan or paying overdraft fees on your bank account. Plus, by creating a realistic payback schedule, and honoring the terms of your contract, you will improve your credit rating rather than damaging it.