For many poor and working-class Americans, gaining access to a traditional bank or a credit line can be difficult. While the fringe banking industry--which includes payday lenders, pawnbrokers, car title lenders, and cash checkers--provides an alternative for these groups, it comes at a costly price.
Now, researchers have found that using fringe loan services may also come at the cost of the borrower’s health, according to a new study from the University of Washington School of Public Health and the Evans School of Public Policy and Governance.
The study, published in the March issue of Health Affairs, found that people who use fringe loan services and those who do not have access to a bank account were 38 percent and 17 percent more likely, respectively, to self-report having poor or fair health than those who do not use fringe services or who have access to a bank account.
“Public health research is limited on this topic,” said Jerzy Eisenberg-Guyot, a Ph.D. student in Epidemiology and lead author of the study. “With this study, we now have the evidence that supports a public health approach to this problem and one that addresses why people are using fringe loan services in the first place.”
Largely non-existent several decades ago, the fringe banking industry grew precipitously in the early 1990s as states loosened interest-rate regulations and national banks absorbed smaller, local institutions like credit unions and savings and loan associations that provided small loans to customers. Today, fringe banking is a multi-billion dollar industry that disproportionately impacts people of color and those with low or volatile incomes.
Given the common use of fringe loans to pay for necessities like rent or medical care, financial instability and scarce resources fuel the fringe banking industry and its profits. Fringe loans are notorious for their annual percentage interest rates of 400 to 600 percent, making it easy for customers to spiral into debt. Unbanked families making $25,000 annually are likely to spend more on check cashing and other fringe services than food on a monthly basis.
The debate around fringe banking has usually focused around whether or not these services are financially helpful to those most at risk of using them. This study, however, which leveraged data from the Census Bureau’s annual Current Population Survey (CPS), is the first of its kind to study the relationship between fringe borrowing and health.
Eisenberg-Guyot analyzed data from two supplemental questionnaires from the CPS between the years of 2011 and 2016. The questionnaires are taken nine months apart; in the June questionnaire, about 15,000 respondents are asked about their use of fringe services and banking status, while in the March questionnaire, the same respondents are asked about their self-rated health status.
Many factors associated with fringe loan use can impact health, such as income level. Thus, to isolate the health effects of fringe loan use and unbanked status from the health effects of these confounding factors, Eisenberg-Guyot used a propensity-score matching technique.
Self-rated health status doesn’t provide much context about the respondent’s specific health conditions. The researchers admit this is a limitation to the data, but the measure has been shown in other studies to be strongly associated with morbidity and mortality. Despite this and other limitations to the data, the study reveals that while fringe loan services are not a root cause of poor health, they likely contribute to it.
“These findings are timely because the new leaders of the Consumer Finance Protection Bureau are delaying compliance with and threatening to roll back payday lending regulations put in place by the former leaders of the Bureau in October 2017,” said Eisenberg-Guyot. “Now, we have the evidence that there are larger ramifications to using these services. It’s not just about finances.”
The authors stress that a combination of regulations, options for alternative banking institutions, and stronger welfare programs and labor protections can help mitigate--and potentially eliminate--the use of fringe banking services. They cite examples like providing universal health care, raising the minimum wage, and resurrecting the U.S. Postal Service banking system.
“This type of work has many policy implications,” said senior author and assistant professor of epidemiology, Anjum Hajat. “There are several ways we, as a nation, could reengineer the social safety net and adjust social policy to assist people who find themselves using these services. I am especially hopeful that changes at the state and local levels will help low income populations.”
The co-authors of this study are Caislin Firth, a PhD student in the Department of Epidemiology, and Marieka Klawitter, a professor at the Evans School. Anjum Hajat’s work on the project was supported by strategic hire funds provided by the University of Washington School of Public Health and the Bill and Melinda Gates Foundation.