Money and Banking Ms. Seguin – Econ 2010/2011

Unbanked Households About 10 million households are unbanked

Unbanked Households

Non-Mainstream Financial Services Unbanked households depend on: – Check cashing outlets – Short-term lenders – Payday loans – Rent-to-own stores

Why have a bank? Nearby Quick Minimal paperwork and hassle Many financial services are provided – Loans – Check cashing – Wire transfers

Example: Paul’s paycheck Paul has a weekly paycheck of $500 He goes to the check-cashing store at the corner He pays $20 to have his check cashed How much does it cost Paul per year (52 weeks) to cash his checks?

Check-cashing Outlet Advantages Cash check immediately Easy – Nearby – Just need ID Use your cash however you want Disadvantages Pay a fee Risk losing the cash No record of the money Failure to establish a financial history with a bank

What is a better option? Cash check at a bank Have check deposited directly into a checking account

Example: Super Bowl Sunday It is almost Super Bowl Sunday and the Wilsons want to have a party On Saturday, the TV dies Mr. Wilson wants to get a new TV, but he doesn’t have the $300 in cash Mr. Wilson decides rent-to-own is the way to go

Mr. Wilson’s Rent-to-own Terms Automatic approval for the lease $50 payment for 12 months Service fee of $30 Return TV at any time 5% sales tax on TV is $15 Questions: What would it cost Mr. Wilson to buy the TV for cash? What is the cost to lease the TV? What might be a better alternative?

Rent-to-Own Advantages Obtain the TV immediately Can return it at any time Easy – Nearby – Just need to sign forms Disadvantages Pay a much higher price for the TV than you would at an appliance store Rent to own sale of $250 TV: Amount financed: $250 Weekly payment: $13 Number of weeks: 78 [18 months] Finance charge: $764 Total of Payments: $1,014 Annual Percentage Rate: 265% Yes, 5 percent per week!

What is a better option? Buy a used TV at a second-hand store Borrow a TV Save $50 per month for 6 months and buy the TV outright

Unexpected Trip to Dentist Diana pays her bills on time This week, her daughter had unexpected dental work done The bill is due by the end of the week After Diana pays the bill, she will be short $200 and won’t be able to get through to her next paycheck She decides to visit a payday lender

Payday Loan Advantages Obtain money immediately Easy – Nearby – Just need ID and proof of employment Disadvantages Pay a higher interest rate Risk being short again in 2 weeks Risk falling further and further behind Payday loans range in size from $100 to $1,000, depending on state legal maximums. The average loan term is about two-weeks. Loans cost on average 470% annual interest (APR). The finance charge ranges from $15 to $30 to borrow $100. For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Shorter term loans have even higher APRs.

What is a better option? Cash advance on a credit card Talk to the dentist to spread out the payment over 2 months Remember us?

What is wrong with non having a bank? No ability to save Higher costs Less secure (cash) Less complete credit history No relationship with a bank or mainstream provider (bank, credit union, brokerage firm)

Services Offered by Mainstream Institutions Checking/Saving/Money Market Accounts Electronic transfers of funds CD’s Loans Mortgages/Home Equity Loans Brokerage services Safe deposit boxes Credit/debit cards

Regulation of Institutions Federally regulated – $100,000 insured by FDIC State regulations Licensing of people who provide services

Benefits of Institutions Lower cost Credit history Security Encourages saving Record keeping

Find a bank today. It is never too late to start!