A flat tire, a kaput fridge, a dental filling: no one enjoys unexpected purchases. But for almost half of Americans, these unforeseen expenses are more than annoying. According to the US Federal Reserve, 47 percent of US consumers don’t have enough savings to pay for a $400 unplanned purchase. For those living paycheck-to-paycheck, an unexpected bill can spell financial disaster.
When you need new car tires to get to work but don’t have the cash — and, worse yet, are one of 50 percent of Americans who don’t have a credit card — you have few options: Borrow money from a friend; take out a high-interest payday or personal loan; or use a rent-to-own or installment plan. Unfortunately, many of the financial products used by lower-income Americans end up dooming them to a vicious cycle of more borrowing, unpaid debts, and ongoing poverty.
The millions of American families who live paycheck-to-paycheck don’t deserve to pay up to four times more for products than the richest American population. Offering hard-working consumers a fair way to finance products they need without interest seems like a no-brainer. And yet, until now, lower-income workers haven’t had a fair, affordable option to buy products on credit.
I believe there needs to be a better option for these people. They need a way to access credit at zero-percent interest, without barriers like credit checks or lengthy applications.
When people living paycheck-to-paycheck need to make an unexpected purchase, their first recourse may be to borrow money from friends and family members. They may take out a payday loan, which can help them make an unexpected purchase or pay a necessary bill. Unfortunately, many people living close to the bone are unable to find the extra cash on their next payday to pay back these loans, and interest rates begin to compound quickly — reaching up to a 500 percent annual rate. Research shows that when it’s impossible to repay a payday loan, individuals often take out another loan to pay back the older one — getting caught in a vicious cycle of interest payments that saps away their meager paychecks.
Then, there are rent-to-own programs. Struggling consumers can rent items by making smaller, somewhat affordable payments each month. But after years of payments, the products often ends up costing up to four times the regular purchase price. Plus, consequences include the merchants coming to their home and repossessing the product for a single late payment.
Lease-to-own programs are just as problematic. Customers end up paying far over market value for the product during the contractual period. If a buyer wants to get out of the contract, he’ll be subject to a large balloon payment, and if he wants to return the product, such as a washing machine, the customer must pay shipping and moving costs to return it to the lessor.
Other high-cost financing options include:
In-store installment financing: This option often looks good on paper, with many stores offering “zero percent APR” financing. But miss a payment by even one day and you’ll have to pay back all the interest that would have accrued since the purchase was made at a much higher rate, say 25 percent.
Credit cards: Although credit cards seem like the most obvious option, millions of Americans can’t qualify for credit because they don’t have a credit history, they have maxed out their current credit cards, or have trouble passing a credit check. There are credit cards available for “high risk” borrowers, but these cards have exorbitant interest rates, high fees, low limits, and severe penalties for missing a single payment.
401(k) loans: 401(k) loans rob workers of their future retirement savings. Although the borrower pays interest back to themselves, there are potential tax penalties for withdrawing before retirement. And if they leave their employer before the end of the loan payback period, the payback schedule is expedited. (Plus, many lower-income workers don’t even have 401(k) accounts to begin with.)
So what’s the solution?
The answer to this predicament is simple. Use technology to give millions of underserved Americans access to fair credit to make necessary purchases. Leveraging big data, we can enable employed Americans to get credit without credit checks, and provide ways for them to make purchases online even if they don’t have credit cards.
Being able to make a major purchase with low-cost credit is great, but planning for the future and creating a savings account is ideal. Since many workers have never learned the basics of budgeting, saving, and payment options, workers also need access to resources and education that will help them understand their current financial life. Once individuals learn how to lower their outstanding debt, set and stick to budgets, and plan for their future, they can avoid using the high-cost financing options whenever a major purchase is needed.
Ending the cycle of paycheck-to-paycheck poverty
Hardworking Americans shouldn’t have to pay four-times more for products than the richest people in America. Buying a new refrigerator, washing machine, or set of tires shouldn’t put a lower-income consumer into a risky and costly situation. And yet, today, that’s exactly what happens to many people who live paycheck-to-paycheck. Working Americans are just trying to support their families — and should not be forced to take out high-interest loans to pay for everyday goods.
Zebit, my new venture, is working with employers and merchants to provide interest-free credit to working Americans. No one can expect to fully fix the growing problem of income inequality in America, but I do believe Zebit can help hardworking people take control of their finances. By offering free financial education and a fair, interest-free way to pay for life’s unexpected purchases, Zebit might just lift a few more families into the middle class. And that’s a goal worth pursuing.