Being Poor Is Expensive

Jun 9, 2014 by

Debt burdenAs personal debt grows, the tougher getting ahead financially becomes as more and more income must be devoted to a useless cost: loan interest and fees. This is a common way low and middle-income folks are sucked down by a debt spiral that leads to debt servitude and debilitating hardship. A typical process:

  1. A family or individual with little savings and income marginally more than living expenses encounters some sort of hardship: a lay off or reduction in work hours, short-term disability, health challenges, a big car repair bill, etc.
  2. To get by, debts grow.
  3. Often any credit cards are already near their limit, and due to a poor or vacuous credit history, a bank loan is out of the question, or no banking relationship at all exists because banks see no economic value in doing business with poor people.
  4. A payday lender is used. The borrower believes the hardship will resolve and things will get back to normal soon. Besides, what other options are there?
  5. The very high cost of a payday loan makes recovery that much tougher. Loan costs grow rapidly, and panic sets in as more and more income is channeled to creditors.

Here are some highlights of the toll taken on Americans by this sort of scenario:

  • The average low to medium-income “unbanked” person spends nearly $40,000 over their lifetime on unnecessary fees.
  • Americans with $20,000 annual incomes spend $1,200 per year on check cashing and money order services.
  • In 2012, financially underserved Americans spent $89 billion on interest and fees.

Welcome to the World of the “Underbanked”

Seventy million Americans either have no bank accounts, have been declined banking service that they’d like, or are otherwise underserved by mainstream financial services. A new documentary, sponsored by American Express®, called “Spent: Looking for Change” publicizes the real life stories of some of the underbanked, highlighting the big costs paid by these folks, making recovery from setbacks and hardships significantly more challenging than it otherwise would be. From the film’s website:

Spent: Looking for Change is a film about everyday Americans without the financial options most of us take for granted and the movement giving them renewed hope.

Turning to pawn shops, check cashing services, and using payday loans to meet basic financial needs can be costly for many of us, with $89 billion a year going to fees and interest for using these types of alternative financial services.

It’s time for change. New technology, new ideas and encouraging dialogue around this issue can help make managing money simple and more affordable.

American Express is sponsoring this documentary to help improve financial inclusion in the U.S. Academy Award®-winning filmmaker Davis Guggenheim is the executive producer of the documentary which is narrated by Tyler Perry and directed by Derek Doneen.

American Express is also spearheading several initiatives to drive innovation in financial services to help improve the financial options available to those who are financially underserved. Find out more and take action.

But For the Grace of God

Maybe you’ve got a good relationship with a bank and plenty of credit. Why should you care about improving the availability of financial services to the less fortunate? Because many, perhaps most of us are one family emergency, one layoff notice, one diagnosis, one big piece of bad luck away from being in exactly the same leaky boat as the people featured in Spent. They’re no different than you and me.

Here’s the film’s trailer:

And here’s the full 40-minute documentary, Money Counselor recommended viewing (direct link here).

Scary, isn’t it?

Recognize Anybody?

Do you see yourself or people you know in this film? What are you doing to insulate yourself from the debt spiral to poverty and growing financial hardship?

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  • Travis Pizel

    Another thing that floors me is how hard it is for less financially stable people to better themselves. How many people could have bettered their monthly financial budget by refinancing their homes….but due to the current lending requirements no longer qualified to get a (new) mortgage on the home they already owned? So instead of lowering their interest rates and monthly payments they’re stuck with a higher payment and a greater chance of default. In what world does that make sense?

  • I know some people who are in this situation. They borrow money to pay off their debts, then borrow money from different lender to pay off their new debts, and the cycle goes like that…

    • That lifestyle has got to be extremely stressful. These sorts of folks would really benefit from a (free!) session with a credit counselor at a nonprofit agency focused on their household budget and a debt payoff plan.

  • I’m definetly going to watch the youtube clip, kind of excited about it. I have family that has and continues to use a payday lender/title company and it’s usually to help out her kids, it kills me.

  • I want to watch the full documentary. Hopefully I can later tonight! I like the stats! So true! I also know that money controls your life more when you don’t have it than when you do.

  • addvodka

    Wow, $40K over a lifetime just in fees? That’s a LOT of money. I can’t even imagine. I have some family friends that are definitely stuck in a bit of a debt cycle. It’s scary and I am sure quite frustrating.

    • Tough to get ahead when you’re spending / wasting that kind of money and the budget’s already super tight. But often these folks have no better option, as shown in the documentary.

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