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Consumers Shunning Payday Loans
For years it has been the general consensus that the unbanked, the underbanked and the underserved turned to the likes of payday loans, check-cashing services, auto title loans and so on to conduct their daily financial affairs. Thay may have been correct a few years ago, but, as of late, it is no longer so.
According to a new study by the Center for Financial Services Innovation (CFSI) and Core Innovation Capital (Core), underserved consumers in the United States spent approximately $141 billion in fees and interest last year.
Everything from borrowing to spending, from saving to planning, the underserved are spending billions of dollars each year to obtain these services, and this represents fewer than 10 percent of the entire financial sector – financial services activity generated more than $1 trillion.
The sixth annual study, however, noted that the underserved are shifting away from payday lenders, both in-store and online. Ostensibly, they’re becoming wiser about the high costs of payday loans.
Researchers discovered that personal marketplace loans soared 210 percent in 2015. At the same time, the use of short-term, high-interest loans declined by 23 percent, which is the sharpest drop in years. The study authors allude to the new regulations and market forces that are helping underserved consumers to take advantage of installment loans and subprime credit cards.
Despite the transition from payday loans to long-term credit, underserved Americans are still spending an exorbitant amount on fees and interest. For long-term credit, the underserved are forking over $55.2 billion. For short-term credit products, the underserved are doling out $26.2 billion. This is a lot of money just to conduct spending in the marketplace.
Ostensibly, according to the researchers, the underserved are financially struggling in the marketplace.
“These numbers affirm our view that everyday Americans are struggling financially, with a majority of American adults relying on high-cost products,” said Colleen Poynton, Vice President at Core, in a statement. “The fact that spending on fees continues to grow at a high rate shows a clear need for tech-enabled entrants to deliver low-cost solutions at scale.”
Using data from the Federal Deposit Insurance Corporation (FDIC), the study revealed that there are 67 million adults in the U.S. that do not have bank accounts and/or use alternative financial services.
Previous reports have come to the same conclusion: there are millions of adult consumers in the U.S. that do not have bank accounts or use these accounts rarely. Due to being unbanked or underbanked, many are turning to payday loan stores, check cashing services and other alternative financial services just to get by. Unfortunately, being underserved is costing millions of Americans a pretty penny.
With that being said, such reports have also concluded that the number of unbanked households sits at a record low. It seems financial institutions are tapping into this market, while consumers are realizing that having a bank account is necessary, even with the soaring fees associated with such accounts.
Payday loans have been blamed for a large number of Americans being trapped in debt. Critics say that the high interest rates, the exorbitant fees and hidden charges and the lack of installment plans are causing so many borrowers to be stuck in a vicious debt cycle. Proponents disagree, and allude the fact that many of these consumers need to access these alternative since they are underserved.