Payday loans can carry annual interest rates of almost 400%

The recent Great Recession has among other things caused many low- to moderate-income individuals to turn away from traditional financial services like banks. The reasons people give range from convenience  to having quicker access to their paychecks.  A recent USA Today article quotes many people who are turning to check cashing places because either they’ve had a bad experience with their bank or have been charged excessive fees.

This is part of a larger trend nationally, and certainly one that we see here in the Bay Area. As many as 26% of Oakland residents are “unbanked” (as compared with 8% of all US households, 17 million people),  with African-Americans and Hispanics much more likely to use alternate means of banking than whites.

Locally, through our Bank On initiative we’ve been trying to reverse that trend and bring families back into the banking system for a number of reasons. The convenience that many people cite has hidden costs. This is something we’ve covered in this space before as there are many different services that appear to aimed at low to moderate income individuals that promise less hassle or convenience but have hidden costs that add up quickly. From the article:

A 2008 study by the Pew Charitable Trusts estimated that the average “unbanked” household in California spends $700 a year just to cash checks. When they need to borrow money, unbanked consumers often turn to payday loans, which carry annual percentage interest rates of 380% or more.

Additionally, studies show that people with bank accounts are more likely to save and move up the economic ladder to financial security.  This is why Bank On is a key part of United Way’s strategy to help families gain financial stability as we move towards our goal of cutting poverty in half in the Bay Area.

The whole article is worth reading, and it even gives a nod to the efforts of United Ways around the country who are also using the Bank On model which works with major financial institutions to offer “second chance” accounts.

(photo via flickr user Jeremy Brooks)