By Meghan Greene, Director
It is an oft-repeated adage that “it’s expensive to be poor” because it’s true. People with higher incomes and good credit pay significantly less for many essential financial services than lower-income families. What’s more, Black and Latinx populations have historically been locked out from access to affordable services. But it has been difficult to quantify the true financial costs these groups pay across a wide range of the most common financial services and how these costs affect their lives.
To shed a brighter light on this disparity and its cost, the Financial Health Network has re-envisioned its long-standing Financially Underserved Market Size Study. In partnership with Prudential Financial, this year’s report – now known as the FinHealth Spend Report – adds large-scale primary research to a study that historically relied solely on secondary data sources.
The resulting 2021 FinHealth Spend Report provides a deeper and more nuanced view into market spending, providing not only aggregate spending numbers but also estimates by several segments of the population – revealing troubling inequities.
Giving Shape and Context to Long-Standing Disparities
The 2020 Financial Health Pulse® found that despite improved aggregate financial health in the United States, disparities by race, ethnicity, and income had only deepened during the pandemic. The 2021 FinHealth Spend Report helps us understand part of the reason – the sizable and ongoing gap in the percentage of income dedicated to fees and interest for products such as credit cards, auto loans, remittances, and overdraft charges by people from varying financial health and demographic groups. For example:
- Financially Vulnerable households – defined by the FinHealth Score® framework as those who struggle in almost all areas of their financial lives – spent 13% of their income on these financial services, compared with just 1% by the Financially Healthy.
- Low- to moderate-income (LMI) households – those with incomes below 80% of area median income – spent 7% of their income on fees and interest versus 3% of higher-income households.
- Black households spent 6% and Latinx households 5% of their incomes on fees and interest, compared with only 3% for White households.
These percentages reflect the average amount a household in a given segment is spending per year on common financial products exclusive of housing, federal student loans, food, childcare, and other expenses. This means that an average Financially Vulnerable household, with an income of $31,000, is spending $4,200 a year on fees and interest alone.
Low-income and financially struggling households and Black and Latinx families are disproportionately turning to alternative financial services, such as payday and pawn loans. For example, Black households are 3.8 times more likely and Latinx households 3.1 times more likely to use payday loans than White households.
What’s more, these populations pay significantly more for other forms of credit, such as auto loans. A whopping 57% of Financially Vulnerable households report poor or no credit, compared with 1% of Financially Healthy households. This can mean the difference between an auto of loan 3.5% (2020 average for super prime) and 20% (average for deep subprime customers).1
Opportunities for Innovation
This research reveals massive spending on everyday financial services by the populations studied. For example, Financially Coping and Vulnerable households together spent $255 billion on interest and fees for these products in 2020. Which raises the question – is this spending actually benefiting their lives?
The Financial Health Network believes that there are significant opportunities for additional affordable, responsible financial services to join the marketplace, as well as for smart policies to protect vulnerable consumers. Financial services should ultimately be evaluated by not only their price tag but also their ability to help consumers to manage their day-to-day lives, be resilient, and take advantage of opportunities.
We urge financial service providers and policymakers to measure the financial health of their customers and to use the insights from this report to design products, services, and policies that support financial health for all. Learn more about financial health market analysis or download the full FinHealth Spend Report.
1Average auto loan rates sourced from Experian and weighted based on new and used auto loan origination split; exclusive of Buy-Here-Pay-Here loans.