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Tough financial times can wreak havoc on people’s relationships with their banks. People may overdraw their accounts and risk losing their accounts altogether. Others may no longer be able to afford service fees. Opting out of the traditional banking system may be one way that people choose to deal with financial difficulties. Consumers should be aware of the problems that can result from using alternative financial service providers.

What are alternative financial services providers?

Alternative financial services providers are businesses other than federally insured banks that meet consumers’ financial needs. Common examples of AFS providers include pawn shops, payday lenders, money wire services, auto title loan providers, check-cashing businesses and rent-to-own stores. These businesses target those whom the Federal Reserve calls “unbanked or underbanked,” or adults who have little or no relationship to a traditional financial institution. A 2011 survey from the Federal Deposit Insurance Corporation, a group representing all federally insured banks in the U.S. revealed that 8.3 percent, or almost 10 million, U.S. households are unbanked. More recent estimates from the FDIC indicate that 56 million adults in the U.S have no relationship to a bank.

The FDIC estimated that AFS providers handle over $320 billion in transactions annually. Some believe that to be a conservative estimate, given the lack of a standardized definition of AFS provider. Those who use AFS providers are more likely to be young, female, unemployed, low-income and unmarried, according to the Federal Reserve. However, a variety of types of people report being underserved by the banking industry. Reasons for not using banks that people cite include service fees and charges being too high for them to afford and the fact that no bank will give them accounts based on their credit histories.

Problems with bank alternatives

Financial struggles may cause people to turn to AFS providers to help them get by. However, doing so may cause more problems than it solves. AFS providers often charge astronomical service fees. Consumers have reported interest rates on pawn store loans as high as 240 percent. Consumers can end up paying fees of up to 5 percent of a check’s value when they use check-cashing services rather than a bank, causing them to lose money. These fees impact people’s abilities to save money. Additionally, consumers do not build positive credit history when they use AFS providers like they do when they have bank accounts.

Talk to a lawyer

Those struggling with money problems may want to consider bankruptcy as an alternative to scraping by with the dubious assistance of AFS providers. Rather than risking losing treasured possessions to pawn store owners or jeopardizing a means of transportation with an auto title loan, people can use the services of a bankruptcy attorney to discharge past debts so they can build a more positive financial future. If you are struggling with debt, speak with a knowledgeable bankruptcy attorney who can help you learn about the options you have to sort out your finances.

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