By: Mandi Woodruff
June 5, 2014
Unless you've experienced poverty first-hand, it's difficult to imagine just how expensive it can be.
Low-income Americans make up the majority of the country's 34 million underbanked households, a group that is often forced to rely on high-cost alternative banking products when they're feeling financially squeezed.
Just ask Melissa and Alex Kimmel. The Scituate, Rhode Island, couple is featured in a new documentary called "Spent: Looking for Change," sponsored by American Express (AXP), which follows a handful of families struggling to cope outside of the traditional banking system.
A no-credit lifestyle
When the Kimmels married in 2000, they made the conscious decision to live a debt-free life. They paid for their wedding in cash, got rid of their credit cards and committed to a cash-only lifestyle.
"Both of us have had credit before and experienced getting in over our heads," Melissa, 44, says. "We thought we were being responsible not having any credit, because we had a lot of friends we were seeing who were getting deep into debt."
When Alex, a musician and recording technician, was diagnosed with Multiple Sclerosis and had to leave his job in 2009, Melissa, an executive assistant at Brown University, became the primary breadwinner for their family. On a salary of less than $40,000 a year, she was suddenly financially responsible for a family of four, including two young sons, one of whom, Jonah, 13, is autistic and requires expensive care.
As the bills stacked up, the couple began over drafting their bank account on a regular basis, getting slapped with as much as $35 in fees each time. Without a credit history (they rent their home), they had trouble qualifying for new lines of credit. A secured credit card would have helped them boost their credit over time, but their credit union required them to come up with $500 to open one -- a lump sum they couldn't afford.
As a result, when they needed $450 to pay for a special developmental test needed to place Jonah in a school for kids with his needs (a test that was not covered by insurance), they went to the only place that wouldn't turn them down for their lack of credit history -- a payday lender.
Americans spend an estimated $7.4 billion every year on payday loans, a highly controversial form of credit that is doled out on the condition that the borrower will pay it back when they get their next paycheck. Given the fact that the majority of people using payday loans already live paycheck to paycheck, it's often difficult to pay loans on time.
When that happens, payday lenders generally offer an option to "reloan" them the money. The borrower pays a fee - $50, in the Kimmels' case -- and gets another two weeks to pay back their loan. If they can't pay the next time, then they pay a fee for another reloan - and so the cycle goes on. Four out of five payday loans are rolled over within 14 days, and more than half of payday loan borrowers wind up paying more in fees than their original loan balance, according to the Consumer Financial Protection Bureau. On top of that, interest rates on these loans can be up to 35 times as much as credit cards.
Over the course of three years, the Kimmels spent $1,700 in fees on their original $450 loan.
"Psychologically, when you're faced with that choice [to reloan] you kind of justify it" because it seems cheaper to reloan than pay off the whole debt at once, Melissa says. "And all of a sudden, it's been six months, it's been a year. It's upsetting to look back and say wow, look how much I've paid into this."
Until a couple of years ago, the payday lending industry was basically the wild, wild West of alternative banking, operating without federal supervision. Since the CFPB began policing the industry in 2012, they have so far fined lenders more than $70 million for illegally harassing borrowers with phone calls and in-person visits, and garnishing their wages.
But payday lenders will continue to exist so long as there are low-income consumers who can't get access to small loans. Though the practice is illegal in a few states, online payday lending makes for a convenient loophole. Internet sales made up 38% of all payday loans in 2012, according to a study by the Milken Institute.
Increasingly, banks are offering small consumer loans that have much better rates than payday loans and don't require excellent credit. But one of the most common traits of payday borrowers is lack of understanding about these options and how to take advantage of them.
The Kimmels eventually paid off their loan balance this year, with a generous and unexpected donation from a neighbor. Melissa recently earned a promotion at work and says they plan on putting the money they had been using to cover their payday rollover fees into a savings account.
"I know personally that some of the struggles we've been going through are humiliating, and I think that's one of the reasons people don't talk about it," Melissa says. "Hopefully, [by sharing] our struggle it takes some of that stigma away."