Why Short Term Loans Make Sense for the Great Unbanked

Check cashing stores offering short term personal loans play a pivotal role for those outside the banking system

Many people are forced to use check-cashing stores to cash checks, pay bills and load cash to debit cards because they don’t have bank accounts or choose to function outside the banking system for various reasons. Many are forced to turn to short term loans because they can’t qualify for traditional loans from banks. These people include the poor who can’t afford to maintain a bank account, undocumented aliens who don’t qualify for U.S. bank accounts and people who fear that their money might be attached to satisfy old debts. Lisa Servon of the University of Pennsylvania recently wrote a book studying these trends, which she called “The Unbanking of America,” according to a pbs.org report.

Servon compiled data while working at RiteCheck in the Bronx to discover why people would willingly pay small amounts to cash checks, pay bills and load debit cards. According to an article posted at
businessinsider.com, Servon spent 20 years studying poor communities of the “underbanked” and “unbanked.” Now a University of Pennsylvania professor, Servon concluded that the traditional views of establishment-based experts–that check-cashing services were unwise and more expensive than using banks–were probably mistaken.

The RiteCheck where Servon worked, according to the Business Insider report, charged $1.50 to pay bills, $0.89 to buy a money order and less than 2 percent of the total to cash a check. Even local business owners cash checks of up to $5,000 and pay about $100 to do so. The reason many business owners are willing to pay these fees is because they employ undocumented workers. Those who cash large checks–including business owners and regular consumers–might do so because they owe money to other debtors or want to hide the money from divorced or estranged spouses.

Servon discovered that people commonly insisted that using these services was cheaper and easier while addressing their financial needs better than banks. Most experts agree that banks concentrate on their wealthier customers and that their services are designed exclusively for those with large savings accounts and high disposable incomes.

Joe Coleman, the president of the RiteCheck franchises of the South Bronx, mentioned that the area his stores serve is the poorest congressional district in the United States where 40 percent of its residents live below the poverty line. Offering transparent, low-priced fees that usually run under $2, RiteCheck is part of a check-cashing industry that earned more than $58 billion in 2010, which was a $45 billion increase over industry income from two decades earlier.

Many People Willfully Avoid Banks Because They Get Better Service Elsewhere

Many people find that maintaining a bank account can be an expensive and intimidating process, so they go where all the fees are transparent and predictable. According to bankdirector.com, the American Bankers Association estimates that it costs between $250 and $400 per year to maintain a checking account. There can also be substantial hidden fees for falling below minimum balance thresholds and bouncing checks. The poor often inadvertently bounce checks because their deposits haven’t cleared. RiteCheck runs 14 stores in Harlem and the South Bronx, and customers seem to appreciate that they never have to worry about their checks clearing. These customers get access to their cash immediately.

Customers can complete multiple transactions in one trip–such as transferring money, paying bills, cashing checks, buying money orders and performing other transactions at reasonable fees. Many check-cashing companies across the United States also offer short term loans or payday loans, but payday loans are illegal in New York. Coleman admits that he would offer loans to his customers if it were legal to do so.

Some of the fees that banks charge their customers often aren’t disclosed according to an article posted at wallethub.com. These hidden fees include:

  • Check printing fees
  • Monthly services fees
  • ATM fees
  • Insufficient funds fees
  • Fees for using online banking tools
  • Penalties for falling below minimums or below $0.00
  • Overdraft fees
  • Uncollected funds
  • Stop payment fees
  • Fees for using outside-network ATMs

Short Term Payday Loans Offer Resources for Cash that Are Readily Available

Short term payday loans offer resources for emergency cash that people outside the banking system can readily access at neighborhood storefronts, check-cashing businesses and online websites. In fact, nbcnews.com reports that there are more brick-and-mortar payday loan companies in the United States than the combined total of McDonald’s or Starbucks franchises–more than 20,000. Payday lending has grown steadily because it fulfills an important need for poor people, those with bad credit and those who operate outside the banking system.

Many people live paycheck to paycheck, and even one unexpected expense can throw their finances into distress. About 41 percent of consumers cite their top financial goals are to stay current in paying their bills or get caught up on overdue bills. Short term payday loans offer borrowers the ability to get cash quickly even when the borrower doesn’t have a bank account. Many payday lenders now offer consumers short term loans on prepaid debit cards according to lowincomefinancialhelp.com.

Borrowers can apply for short term payday loans or short term personal loans online or at brick-and-mortar stores including many check-cashing places throughout the United States. Although check-cashing business owners and author Servon aren’t sure that short term loans are the best option for everybody, they admit the loans remain popular with the borrowers who don’t have other resources since they don’t have access to banking resources and established good credit.

Other services available at these one-stop shops for people without bank accounts include:

  • Making loan payments
  • Transferring money
  • Renting post office boxes
  • Using a notary
  • Receiving EBT services
  • Renewing motor vehicle registrations
  • Buying stamps, envelopes and other mail services
  • Exchanging currency
  • Getting copies made and sending faxes
  • Buying gift cards
  • Picking up bus passes, rapid transit tickets and lottery tickets

Build Your Credit Score with Strategic Decisions

Regardless of whether you currently use a bank, it’s possible to improve your credit score so that you can get access to lower interest rates for short term personal loans. A good credit score can make your life cheaper and generate more borrowing options. You can get a lower rate on a mortgage to buy a home, qualify for a better job and get approved for renting a better home or apartment. For example, according to an article posted at entrepreneur.com, a person with excellent credit might pay $1,187.84 in yearly mortgage interest while someone with poor credit would pay $3,161.76.

The Entrepreneur article also recommended the following ways to build or repair your credit:

  • Keep Your Credit and Loan Balances Low
    Paying down your total indebtedness lowers your debt-to-income ratio, which is a key area that credit managers consider. When you pay your bills as promised, your credit rating gets a positive bump. Allowing an account to go collections is one of the worst things you can do because that will lower your credit score considerably. If you can’t make a payment on time, try to get an extension.
  • Maintain Your Accounts
    Don’t cancel accounts that you haven’t used recently. Maintaining open credit accounts proves that you don’t rush to use any available credit.
  • Get a Secured Credit Card
    If you don’t qualify for a traditional credit card, you can usually get one by putting at least $10 a month into a secured bank account to serve as collateral for a secured credit card.
  • Correct Any Inaccuracies in Your Report
    Sometimes, the credit reporting bureaus make mistakes by including ineligible or incorrect information. There are time limits on how long certain debts can be reported, and erroneous information is common.
  • Keep the Number of Credit applications to a Minimum
    Applying too often for credit can lower your score, so apply only when you need the money and only to those lenders that meet your needs.
  • Pay Your Utility Bills on Time
    Habitually paying your utility bills late can lower your credit score or improve it if you always pay on time.

Brick-and-Mortar Check-Cashing Services Provide Options for the Unbanked

Financial service centers offer prepaid debit cards that can be used to receive funds from short term loans or your pay from an employer. According to a PDF posted at fisca.org, financial centers sell more than 2.8 million prepaid debit cards that load about $5.3 billion annually. You could even establish an FDIC-insured savings account that earns interest by loading money on a NetSpend prepaid debit card. In most financial centers, you can buy money orders to pay bills and purchase products without worrying about how long it takes to collect the funds from your deposited checks.

Short Term Personal Loans Provide Additional Options for Disenfranchised Borrowers

Until recently, people without bank accounts couldn’t get short term personal loans or even payday loans. Borrowers can now load their loan funds on prepaid debit cards that they can use just like a credit card to pay bills, get cash from ATMs and transfer money in other ways. You need to provide proof of income and identity to qualify for a prepaid card, and once one has been issued, you can use the card to receive funds from various types of short term personal loans. The possibilities for short term loans include:

  • Internet-based loans
  • Payday loan offices
  • Check-cashing companies
  • Automobile title loan companies
  • Peer-to-peer lenders
  • Installment loans from various lenders
  • Collateral-based lenders
  • Pawn shop lenders who loan money on personal valuables
  • Credit Unions
  • Community-based lenders

Relying on Available Resources to Make the Best of Your Financial Options

Payday lenders offer various types of loans that include automobile title loans, payday loans, installment loans, business loans and personal loans to all classes of borrowers including those with bad credit, poor credit and those without bank accounts. If you don’t have a bank account, you probably have poor or bad credit, but it’s nice to know that you have options in today’s digital economy. You can pay your bills, transfer money and cash checks by taking advantage of those services offered by check-cashing companies.

You might even arrange for short term payday loans or other types of loans in one-stop shops for paying your bills, cashing your checks and performing other financial chores. There are other check-cashing resources for those without banks accounts that include:

  • Cashing checks at local retailers such as Walmart, 7-11 and local “mom and pop” shops
  • Getting your employer to cash your check
  • Using prepaid card accounts
  • Presenting the check at the issuing bank, which usually requires two forms of valid identification

Even people who have small bank accounts often prefer to rely on alternatives to banking services to cash checks, get short term payday loans and transfer money. These consumers understand that they can get their money faster instead of waiting for their deposits to clear. Hbr.org reports that most people worldwide in emerging economies and many of those in established economies are unbanked. The United States has 106 million unbanked or underbanked citizens.

If you don’t have a bank account, it might limit your options with today’s financial services. You only need to pay for what you need, and you can load a prepaid debit card to pay your bills online using your phone. Banking services are designed to cost less for those who can afford to maintain larger balances. It makes more sense for many people to pay only for those services that they need, and clear postings of fees for all services–including personal loans–make it easier to budget your money. Find out more about loans, check-cashing services and people who opt out of the banking system at the Personal Money Store.