Is the Unbanking of America happening?

Courtesy of

The issue of payday loans is widely discussed by many people and in many books as well. One of such books is The Unbanking of America written by, a professor from the University of Pennsylvania, Lisa Servon. The author lets us see the banking system from inside, and at the same time she delivers portraits of businessmen, who react to the unbanking of the USA.

Let’s imagine that you have a low paid job and are living from paycheck to paycheck. You might have a poor credit story that does not let you borrow some money from a bank. And finally your car that you use to get to your job every day breaks down. It is obvious that you do not have enough money to fix the car and to pay your rent; you have to choose only one option. What would you choose? Ariane, a heroine of the book The Unbanking of America by Lisa Servon, was in exactly the same situation.

Ariane believes that the perfect solution in this case is to take a payday loan. And Ariane is not alone in her opinion that the payday loan is the best option when you urgently need some money, about twelve million of Americans are in the same mind.

Who uses payday loans?

As it has already been said, payday loan is a good way out for people who have some unexpected expenses. They might include money to repair a car, money to pay for a medical bill and money to pay a rent. It is stated that people, who are ready to take a payday loan are female or African-Americans, who have low credit score and whose annual income is less than thirty-five thousand dollars. These people are more likely to take a payday loan rather than to use their credit card. They believe that taking a payday loan would be cheaper than to use a credit card.

What is the Payday Lending Business Model?

Some people think that payday loans are evil and bring profit only for the lenders, but, in fact, many specialists confirm that the sphere of payday loans is driven by consumer’s demand.

Lisa Servon worked as a check cashier in one of the organizations that provide payday loans. She admitted that people liked that such organizations are more transparent and do not make you pay any extra fees as conventional banks can do.

In addition, a lot of borrowers complain about high cost of payday loans. The cost of payday loans is determined by the risk that the lending organization has. It is the risk of default on payment. An average default rate for payday loans is twenty per cent. It is very high in comparison with the default rate of conventional banks that is about three per cent. But we should know that about two thirds of the money payday lenders collect is used to repay the overhead on payday loan stores. How to repay?

Experts say that about eighty per cent of people who have a payday loan cannot manage to repay it on time. We might expect that these people curse the very day they stepped over the sill of the lending organization, but actually their opinion is absolutely the opposite.

Although Ariane had not managed to repay her debt on time, because she needed money to pay her rent and to buy food, anyway she had her car fixed and she still had her job, and soon she was able to repay her debt.

In addition, Lisa Servon highlights that the process of taking a loan in conventional banks takes a lot of time. You have to go to the bank with all the required documents and then wait for your loan to be approved and only after that you can take the money you need. But when you lack time and money you cannot wait for so long.

Nowadays, when the banking system is not transparent and when bank loans are not available for everyone, more people feel positive about taking a payday loan. Even if payday loans are not suitable for everyone, they can be a source of money for thousands of desperate people.

Read more:

The Unbanking of America: How the New Middle Class Survives – PW
How the Consumer Financial Protection Bureau’s Payday Loan Rule Hurts the Working Poor – CEI