Two financial services that have grown in popularity in the US during the past few decades are payday loans and check-to-cash. Despite the fact that these services might give people in need instant access to cash, they sometimes have hefty fees and interest rates that can trap borrowers in debt for months or even years.
The prevalence of payday loans and check cashing in the USA, as well as their potential effects on consumers, will be discussed in this article.
Similar to payday loans, check-cashing businesses are subject to different laws in every state.
Payday Loans
A payday loan is a small amount usually returned on the borrower’s following payday. People often get these loans when they need cash immediately to pay for unexpected costs like car repairs or medical bills. People having difficulty making ends meet and needing assistance paying bills or other regular obligations can also use them.
National Statistics on Payday Loan Usage in the USA
Consumer Financial Protection Bureau (CFPB) research shows that more than 12 million Americans take out payday loans each year. The study also discovered that the typical payday loan user takes out ten loans annually and accrues debt for about 200 days. This implies that many borrowers wind up rolling over their loans because they are unable to pay them off in time, incurring additional penalties and interest costs.
Payday loans can have very high fees and interest rates. According to the same CFPB research, an average payday loan costs $15 for every $100 borrowed, for an annual percentage rate (APR) of close to 400%. This implies that if a borrower takes out a $500 payday loan, they will owe $575 in two weeks, which may not seem like much, but it can soon add up if they cannot repay it on time.
State-Specific Statistics on Payday Loan Usage in the USA
Each state has its rules about payday loans, making it more accessible for people in some places to get them than others. The top five states with the highest utilization rates of payday loans, according to the Pew Charitable Trusts, are:
In Alabama, for example, there are more than 1,000 payday loan businesses, more than the state’s McDonald’s franchises. Also, compared to the rest of the country, Alabama payday loan borrowers get an average of eight loans per year and have debt for an average of 129 days.
Variations in state regulations can also impact the fees and interest rates that payday lenders are permitted to charge. There are restrictions on the costs that payday lenders can demand in some areas, including California and Oregon, but not in others, like Texas and Florida.
Check Cashing
Check cashing is another financial service that has grown in popularity in the United States. Checks can be cashed using this service without a bank account, and people who need access to standard banking services frequently use it. Yet, check cashing costs can be expensive, significantly reducing a person’s take-home earnings.
National Statistics on Check Cashing in the US
According to the 2021 FDIC National Survey of Unbanked and Underbanked Households, 5.9 million households in the United States do not have a bank account. This makes it more likely that these households will use alternative financial services, like cashing checks.
According to the same report, check-to-cash businesses charge an average fee of 2.25 percent of the check’s entire value. This implies that a person would pay $22.50 in fees for cashing a $1,000 check at a check-cashing business, which can add up over time.
State-Specific Statistics on Check Cashing in the USA
Check-cashing businesses are subject to different laws in every state, just as are payday loans. There are restrictions on the fees that check cashing businesses can charge in some states, including New York and California, but not in others, like Georgia and Texas.
According to research by the Center for Responsible Lending, Georgia has some of the highest check-cashing costs nationwide. According to the study, Georgia charges an average of $50 to cash a $500 check, much more than the $11 national average. The survey also revealed that check cashing businesses in Georgia earn over $153 million in fees annually.
Impact on Consumers
The high fees and interest rates that come with payday loans and check-to-cash may significantly affect consumers, especially those already having trouble with money. According to research, those who use payday loans are more likely than non-users to have financial difficulties, such as bankruptcy and falling behind on other obligations.
Payday loans and cashing checks can cost people money and put them at risk of fraud and identity theft. Some payday lenders may ask borrowers for information like their Social Security Number and bank account information that could be used to commit fraud.
Alternatives to Payday Loans and Check Cashing
Nevertheless, there are alternatives to payday loans and check cashing that can spare customers from high costs and interest rates. Small-dollar loans, for instance, are frequently available through community banks and credit unions with better terms for repayment and cheaper interest rates than payday loans.
Additionally, some nonprofits provide financial counseling and education programs to help clients become more financially literate and make better financial decisions. These initiatives could include credit counseling, debt management, and budgeting support.
Key Points
- Payday loans are taken out annually by more than 12 million Americans, with an average charge of $15 for every $100 borrowed and an APR of nearly 400%.
- Payday loans are standard in Alabama, Mississippi, Louisiana, South Carolina, and Oklahoma. Fees and interest rates vary from state to state because of different regulations.
- In the USA, 7.1 million households lack a bank account, making them more inclined to use alternative financial services like checks to cash. The average charge to cash a paycheck is 2.25% of the check’s entire value.
- Payday loans and cashing checks can significantly affect consumers and make them more likely to face financial trouble, fraud, and identity theft.
- Payday loans and cashing checks can be replaced with small-dollar loans from community banks and credit unions and financial counseling and education programs from non-profit organizations.
