Several weeks ago, when State Auditor Foley made his now infamous comments about people with lower incomes, we were struck by one of the big pieces of the puzzle that he had missed. Foley was referencing an audit in which they found that funds from the state intended for energy payments weren’t used appropriately. While we agree that there should be accountability for ensuring that these funds are properly used, we were also struck by other comments that Foley made during the event. He said that their office found these checks cashed at Wal-Mart, liquor stores, grocery stores, a keno parlor and “all over the place.”
Cashing checks in nontraditional places is a symptom of a lack of access to traditional banks. Auditor Foley missed the fact that many low-income people have been pushed outside of the traditional banking system where a series of expensive pitfalls await.
Most of us take having a bank account for granted as a part of our everyday life. But for families without large amounts to put in a bank account, it can be a daunting world of unexpected fees or significant overdraft charges. These fees may drive them out of the traditional banking system altogether. Oftentimes, these families are driven to what are euphemistically called “alternative financial products.”
About 3.7% percent of Nebraskan households are unbanked and an additional 17.8% are underbanked, meaning that they don’t have a financial institution that meets all of their routine needs. These are the households that are the primary customer for alternative financial services. These alternative financial services include things like check cashers, where people pay a significant fee just to access their own money and payday lenders — who charge interest rates of over 400% for short term loans.
Borrowers take a out a loan against the value of their next paycheck, but are often unable to pay it back within that short time frame. The loan then rolls over and accrues additional interest. This cycle can leave borrowers trapped in debt cycle for years, and it’s part of the larger story on poverty. One report estimated that Nebraskans paid over $25 million dollars in interest on these types of loans in one year.
The fact that needing an emergency loan for something like a car repair can lead to years of loan debt is part of the challenge for low-income families. Lacking emergency savings, they are often just one unexpected emergency away from disaster. In order to ensure that people in poverty can climb the financial ladder, they need a foothold into mainstream financial services. For many families, building enough financial security to get into (or get back into) the banking system can itself be a daunting task.