Alternatives to Avoid

What Not to Do
Most people manage their money through traditional financial services such as banks, credit unions, and S&Ls. However, some people rely on significantly more costly alternatives such as check-cashing outlets, payday lenders, and rent-to-own stores. Although these types of service providers may seem convenient, the amount of fees consumers pay over the course of a few months to a year is often significantly higher than the cost of using a traditional financial institution.

Check Cashing Outlets
Check cashing stores charge fees for cashing a government, payroll, or personal check. The average cost is usually between 2-6% of the face amount for a government or employer check. For example, even at the lowest rate of 2%, cashing an $800 check would cost you $16. Cashing a personal check often costs even higher fees.

Payday Lenders
Payday lenders offer loans until you receive your next paycheck, and require a postdated personal check. These loans can carry enormous fees equivalent to approximately a 400% annual percentage rate (APR). One of the most expensive forms of borrowing, these loans are never a smart choice.

Rent-to-Own Stores
Rent-to-own companies rent appliances, furniture and electronic goods to consumers for a specified period of time, after which the customer becomes the owner. In most cases, if you miss a payment, the store will re-possess the merchandise even if you’ve already paid more than market value. Three out of four people who sign up for rent-to-own plans lose both their money and their merchandise when they can’t make payments. Rent to own is often more expensive than buying outright because of the higher interest rates.

Comparing Costs
As an example, let’s compare Alicia and Maria and see how much they pay for financial services. Maria uses a traditional bank, while Alicia uses alternative financial services such as check cashing outlets and wire transfer companies.