Alternative Financial Services Information
Alternative financial services (AFS) are financial services provided outside traditional banking institutions, on which many low-income individuals depend.[1][2] The services are often similar to those provided by banks, and include payday loans, rent-to-own agreements, pawnshops, refund anticipation loans, some subprime mortgage loans and car title loans, and non-bank check cashing, money orders, and money transfers.
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Alternative loan products
Further information: Rent to own, Pawnbroker, and Refund anticipation loan See also: Subprime lending and Title loanPayday loans
Further information: Payday loanA payday loan is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card (see cash advance).
In the United States, finance charges on payday loans are typically in the range of 15 to 30 percent of the amount for the two-week period, which translates to annual percentage rates (APRs) from 390 to 780.[3]
Borrowers visit a payday lending store and secure a small cash loan, with payment due in full at the borrower's next paycheck (usually a two week term). The borrower writes a postdated check to the lender in the full amount of the loan plus fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower doesn't repay the loan in person, the lender may redeem the check.
Lenders also make payday loans online.
Payday lending often face legal battles and public perception challenges. Opponents say it drains money from low-income communities and exploits financial hardship for profit, and denounce the industry's aggressive advertising and collection practices, pricing structure, and unusually high profitability. Payday lenders have been known to ignore usury limits and charge higher amounts than they are entitled to by law.[4]
A 2007 staff report by the Federal Reserve Bank of New York noted that payday loans are very expensive and often made to under-educated households or households of uncertain income, but concluded that the loans should not be categorized as "predatory" since they may improve household welfare.[5]
See also
- Alternative financial services in the United States
- Crowdfunding
- Microfinance
- Person-to-person lending
- Non-bank financial institution
References
- ^ Bradley, Christine; Burhouse, Susan; Gratton, Heather; Miller, Rae-Ann (Q1 2009), "Alternative Financial Services: A Primer", FDIC Quarterly (Federal Deposit Insurance Corporation) 3 (1), http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_1/AltFinServicesprimer.html, retrieved 30 May 2010
- ^ Blank, Rebecca M. (April 16, 2008). "Public Policies to Alter the Use of Alternative Financial Services Among Low-Income households". Federal Reserve Board Academic Consultants Meeting on Non-traditional Financial Services, April 16, 2008. Brookings Institution. p. 1. http://www.brookings.edu/papers/2008/0416_low_income_blank.aspx.
- ^ CNN Money. A low, low interest rate of 396 percent
- ^ "Internet Payday Lender Fined More Than $230,000 for Unlicensed Lending In Illinois". Press release. Illinois. 2008-05-30. http://wwwc.illinois.gov/PressReleases/ShowPressRelease.cfm?RecNum=6001&SubjectID=1. Retrieved 2008-06-11.
- ^ "Defining and Detecting Predatory Lending", Federal Reserve Bank of New York Staff Reports, Number 273, January 2007
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