Payday loans are only available to banked individuals since, in a traditional payday loan, a customer writes a personal check made out to the lender. The lender agrees to hold the check for about two weeks before depositing it. In exchange, the payday lender advances a cash payment to the customer that is somewhat less than the amount of the check. The difference, which is the “finance charge,” in combination with the maturity of the loan determines the annualized interest rate. In the states where payday lending thrives, lenders typically charge $15 to $25 for each $100 that they advance. That is, in a typical transaction, a borrower might write a check for $235 that the lender agrees to hold for two weeks and the lender would provide the borrower with a $200 cash advance. The annualized interest rate on such a loan is 455 percent.

Prior to the maturity of the loan, the borrower can pay the lender the face value of the check in cash, extinguishing the debt and concluding the transaction. If the borrower does not repay the loan by its maturity, the lender may deposit the check. Assuming that the check clears, the loan is fully repaid and the transaction is complete. If a borrower does not want to repay a loan at maturity, or cannot, a lender will frequently allow the borrower to renew the loan by “rolling it over”. In a rollover, the borrower pays the lender the finance charge due at maturity and the lender agrees to hold the check for another specified period of time.

Survey data (Caskey 2002) indicate that most payday loan customers are not officially poor. Rather they belong to moderate-income households, with incomes between $18,000 and $50,000, but they struggle to pay their bills on time. The vast majority of payday loan customers do not have access to convenient lower-cost credit from mainstream lenders because they have severely impaired credit histories or because they have reached the limit of the credit lines these lenders are willing to extend.

# C.  Why don’t the unbanked use banks?

A number of surveys have sought to answer the question: Why don’t the unbanked use banks? In almost all of these surveys, unbanked individuals respond most frequently that they don’t need a bank account because they have no month-to-month savings to safeguard. This response is also consistent with the OCC findings, discussed above, regarding the financial savings of the unbanked. Generally, the second and third most frequently cited explanations are bank minimum balance requirements and bank fees. But these too are related to a household’s level of savings since minimum balance requirements will generally not be binding on individuals able to maintain about $100 of month-to-month financial savings. In addition, low balances in an account frequently trigger many bank fees, such as monthly account fees and bounced check fees.

Other reasons that people give to explain why they do not have a deposit account include concerns about privacy, a lack of comfort interacting with banks, language barriers and banks not letting them open accounts. People who banks do not permit to open accounts likely have histories of writing bad checks, have severely impaired credit records, or do not have required identification. People who say that they do not open an account out of a desire for privacy may have a number of concerns, including: 21