online cash advance
The Cost of Online cash advances: Not Excessive, Study Shows
There are numerous entries in the volumes of study on online cash advances which suggest that low- to middle-income (LMI) families are the most frequent users of the product. Where access tocredit and liquid assets are limited – particularly in areas that are not well-served by the traditional banking industry – the need for short term credit is greatest. Yet online cash advanceindustry critics continue to produce statistics which they claim are evidence that too much of LMI families’ income is being eaten up by the allegedly excessive fees that payday lendingoutlets charge for their services.
Not According to this University of Michigan/Federal Reserve Study
In an August 2009 paper entitled “And Banking for All?” by Michael Barr and Benjamin Keys of the University of Michigan and Jane Dokko of the Federal Reserve Board, we see the expense for alternative financial services like online cash advances expressed in very different terms for LMI families. Contrary to your average slapdash media expose, their well-researched study found (using the Detroit area as a sample) that “for the vast majority of households, annual outlays on financial services for transactional and credit products are relatively small, around one percent of annual income.” Online cash advances and similar alternative financial services make up only a fraction of that, as we’ll see.
The Nature of the Study
The authors derive their data from the Detroit Area Household Financial Services (DAHFS) study. The survey takes into account which alternative and mainstream financial services LMI households tend to use. Respondent demographics, socioeconomic patterns and full access to balance sheet information helped the authors to piece together an interesting portrait of nearly 1,000 Detroit LMI households. Mainstream financial sector fees like annual bank account fees, check fees, NSF fees, bank overdraft charges and annual credit card fees are significant, while alternative financial service costs like money orders, check cashing, online cash advances and others are somewhat less so.
Banked vs. Underbanked (or Unbanked)
The authors found that LMI households with access to bank accounts were more financially active and had access to more forms of credit than those households with little or no traditional banking usage. In short, the banked households tended to spend more. Underbanked LMI households displayed less willingness to access credit, but their status did not entirely preclude them from mainstream bank services. Furthermore, the state of being unbanked was shown to be a far from permanent condition. Expanding bank policies which strive to extend services to the “invisible minority,” would account for this.
Who Chooses Online cash advances?
“The alternative financial services sector plays a significant role in the provision of financial services to LMI households,” write the authors. According to Federal Reserve studies like those conducted by Brian Bucks et al in 2006, 25 percent of such households nationwide tend to be unbanked. This creates the need for such products as online cash advances and check cashing services to fill the gaps that traditional forms of credit might be used.
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