money and banking ms. seguin – econ 2010/2011. unbanked households about 10 million households are...
Post on 27-Dec-2015
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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: $250Weekly payment: $13Number of weeks: 78 [18 months]Finance charge: $764Total 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 LoanAdvantages
• 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 monthsRemember 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
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