Alternative Financial Service Providers: Understanding the Products, Services, Costs and Benefits
Alternative financial service providers like check cashers, pawn shops and payday lenders exist for a reason – they are often convenient, provide friendly service, and make it easy to access services. They have short applications, request only a small amount of personal information, and do not conduct credit checks or income verification.
However, alternative financial service providers charge interest rates and fees that are much higher than banks or credit unions. Some of these charges can rise so high that they lead to financial troubles, including debt traps. A debt trap occurs when the only way you can pay off one debt is to take out another debt to cover it.
A very common alternative financial product is a payday loan. Payday loans are seven to fourteen day loans designed to be repaid with the borrower's next paycheck. They are secured with a check post-dated to the repayment date for the amount borrowed plus a fee. If the borrower cannot afford to repay the loan in two weeks, they will often renew the loan, paying a fee to extend the loan for two more weeks. The average person takes out a $375 loan and ends up taking 5 months to repay this loan.This means he has renewed or rolled over the loan 5 – 7 times.
Signature loans or small dollar loans, pawnshop loans, and car title loans are additional examples of ways people get needed cash when they have few options. Signature and small dollar loans work like payday loans, but pawnshops and car title loans involve securing the loan with an asset.
Pawnshop loans are secured with a wide variety of assets, from musical instruments to jewelry to yard equipment. The pawnbroker gives a loan that is equal to a fraction of the value of the asset. If the individual returns within the time specified and pays back the loan, she will get her property back. If she returns within the time specified, but does not have enough money to repay the loan, she can renew it for a fee. If she does not return to repay or renew the loan, the pawnshop will then sell the item to cover the loan.
A car title loan is similar, but the loan is secured with the title to an automobile. For families that rely on their cars to get them to jobs, childcare, and school, a car title loan can be risky. If they don’t pay the loan or fees as agreed, they can lose their car.
What are some alternatives to payday, signature, pawnshop, and car title loans?
In the short-term, it could be a credit card or even a credit-building loan from a bank or credit union. If you have a negative credit history, then consider a loan from a family member or friend. You could also try cutting spending on other things to cover expense.
In the medium and long-term, you may want to consider building up your emergency savings or finding a way to earn more income.
Avoiding high cost financial products and services from alternative financial service providers may mean more money in your pocket today, more financial stability tomorrow, and a path towards achieving your financial goals.