Underbanked Americans Are More Inclined To Rely On Payday Loans

For many Americans, the idea of not having a bank account is unfathomable. Because having a bank account is necessary to secure many of the services Americans utilize, such as car loans, home loans, and credit card accounts, the concept of not having an account is incredibly foreign. Even payday loan lenders require a bank account, further demonstrating how ingrained traditional banking is in American society.

Yet, being unbanked (without a bank account) may not be as far-fetched or uncommon as one may presume. The FDIC’s 2011 National Survey of Unbanked and Underbanked Households revealed that one in twelve–or the equivalent of ten million households–do not have a bank account. In fact, America has more unbanked households than Canada, the UK, and Australia. Furthermore, the same study indicates the 20.1 % of American households are underbanked, meaning that they have a bank account but rely on other, non-traditional banking practices, such as Payday Loans, non-bank check cashing and money order services, and pawn shops.

Unbanked households are at a serious disadvantage, according the FDIC, as they are excluded from many of the services that help foster financial security, while underbanked households are more inclined to suffer the high-interest rates associated with non-traditional banking practices, such as payday loans. This begs two questions: which demographics are most at risk and why are Americans shying away from traditional banks?

The demographic of unbanked adults in the US is comprised predominately of women with no high school degree who were born in another country. Because uneducated women are generally lower income, they are more at risk of being excluded from traditional banking. Women also happen to be more inclined to utilize payday loans, very likely due to similar economic issues.

According to the FDIC, 49 % of unbanked Americans claim that they simply do not have enough money to maintain or need a bank account. Ironically, the low-income are probably the most in need of a bank account, as they tend to be more reliant on financial services such as home and car loans. Where those in higher income brackets can pay for some of these services with cash, low income families do not have this luxury. Additionally, 44 % state that they do not trust the banks enough to have a formal account. With bank bailouts and Wall Street crises, it is understandable that many find themselves questioning the stability of American banks. Clearly, banks need to restore the trust of the public in order to ensure a financially fit American populace.

While the unbanked face the probability of being unable to ensure financial security, the underbanked are likewise at risk of financial hardships. Because many of the underbanked do not have savings accounts, they are not preparing for their financial future and thereby face the likelihood of accruing debt when unforeseen problems arise. The FDIC reports that 29.3% of Americans are without a savings account; this staggering number indicates that nearly one-third of the American population are at risk of becoming underbanked when unexpected costs arise.

Those with a solid savings account are far less inclined to  rely on payday loans online  and credit card advances because they have a built in safety net that catches them should they face a financial fall. Inversely, the underbanked and others without savings accounts are more inclined to rely on high-risk loans, to accrue debt, and to face an unsecure financial future.