Approximately 37.9 million people in the U.S. live in poverty (Lee, 2023), and this number is growing every year. Have you ever wondered what challenges those people face when trying to escape poverty? People who do not have a bank account and need to borrow money quickly have to rely on payday loans or pawn shops. While these options seem like an easy deal, they charge sky-high interest rates, which dramatically increases the final payment that the debtor has to pay. However, there is an alternative for borrowing money safely: use a bank.
Low-income individuals often have to rely on payday loans and pawn shops because they need a short-term loan to pay for necessities or because they do not have access to a traditional bank account. According to Brent Adams, co-author of the Predatory Loan Prevention Act and Senior Vice President of Policy and Advocacy at Woodstock Institute, “Pawn shops continue to charge up to 243.3% interest even though the Predatory Loan Prevention Act set a rate cap of 36% on consumer loans” (Adams, 2023). Ultimately, these fees halt people from gaining financial freedom.
However, an alternative to borrowing from these high interest rate sources is to register for a bank account. About 5.9 million households in the U.S. are not enrolled in banking (Sweet and Hendrickson, 2022). A movement called BankOn ensures access to safe and affordable banking for those who are unbanked. The goal is for banks and credit unions to have safeguards in place so people do not overdraft their accounts and there are no excess fees when a cardholder overdraft. As stated by Paige Diner, a principal at the CFE Fund who works with BankOn, “Overdraft fees can be very predatory, which causes people to get into a debt cycle” therefore “having a negative experience with the banking system,” however, “not having a bank account can be very detrimental to somebody’s financial goals.” When you don’t have a bank account, you have to rely on other methods for monetary exchange that charge unnecessary fees, but signing up for a bank account allows you to borrow money at lower rates and will have major benefits for the rest of your life.