Who Uses Alternative Financial Services?

Alternative financial services (AFS) such as payday and auto title loans, are a fact of life for over 36 million consumers in the United States alone.. Even so, some people may wonder why anyone would use these kinds of services, especially considering that their rates are so high and their tactics are sometimes described as predatory.

A lot of factors go into people’s decision to do business with an AFS provider. Those who access alternative services are just as rational as anyone else but tend to face social, geographic, and demographic challenges that limit their financial choices. Like other people, AFS clients are doing the best they can under their circumstances.

In neighborhoods traditional banks have abandoned, AFS establishments have filled the void. Their customers often need money on an ongoing or urgent basis and have few alternatives. Clients of AFS providers include:

People with a Low Credit Score (Subprime Borrowers)

Lenders use systems to classify would-be borrowers according to their risk of making late payents or failing to repay a loan. The most common measure of consumer credit risk, the FICO score, is used to rate consumers on a scale from 300 to 850.

People with the best credit history are in the prime category of borrowers. Prime borrowers typically have a FICO score of at least 670. Their healthy income, good payment history, and low debt minimize their risk of nonpayment. As such, lenders offer them the most favorable terms, including low interest rates and fees. Prime borrowers are welcome at traditional banks and credit unions.

Consumers with a lower FICO score, usually under 670, are known as subprime borrowers. Their credit history may include defaulting on loans, using too much credit, missing payments, or applying for a lot of credit in a short span of time. Banks see these borrowers as posing an increased risk of nonpayment. About one-third of Americans fall into this category. Subprime borrowers don’t qualify for the lowest interest rates and fees. Sometimes they can’t get a loan at all from a conventional bank or credit union. People with low credit scores may have nowhere else to turn but to alternative financial service providers.

Those Experiencing a Financial Crisis

People generally turn to alternative financial services for one of two reasons: an ongoing shortfall of money to make ends meet, or an unexpected financial crisis (for example, a disaster or personal injury). These situations are difficult and can leave people in shock.

The distress felt by people facing a financial emergency can affect their decision-making. It’s understandable they’d be more focused on how they can solve their immediate money problems than on how they’ll repay a loan in the future.

They also tend to underestimate the difficulty of repayment. Researchers call this perspective tunneling after the tunnel-vision style of thinking that can take place during urgent financial circumstances.

Predatory lenders have been known to reinforce a short-term perspective in their marketing by emphasizing the benefits of having money now. For example, they use words like easy, quick, immediate, instant, and same day and minimize the challenges and true cost of repaying a loan.

Sadly, the high interest rates and steep fees of alternative lenders can deepen and prolong a financial crisis for some borrowers.

People Experiencing Poverty

Not everyone who uses alternative financial services is enduring hard times, but many are, and it’s good to know the kinds of situations that would cause people to seek money from alternative providers.

Poverty is a multifaceted condition, and quite a few types exist, including situational, generational, absolute, relative, urban, and rural.

Situational poverty results from an unexpected event such as a natural disaster, pandemic, accident, or serious illness and is likely to be temporary (even though it may take a long time to bounce back). People at a lower-to-middle income level can sink into dire circumstances and struggle hard to overcome them.

On the other hand, some families find themselves in an enduring cycle of generational poverty. The families experience a persistent low income from one era to the next. In this case, children are born into poverty and grow up in a cycle of disadvantage without a path to escape it. These surroundings create an ongoing need for cash to make ends meet. People living in entrenched generational poverty are key consumers of alternative financial services.

Absolute poverty is utter poverty. Families experiencing absolute poverty are likely hungry and may go without necessities of life such as health care, clean clothing, and adequate (or any) housing. Absolute poverty is more common in low-income countries, but it si also found in higher-income nations. In 2016, almost 8.2% of children in the U.S. lived in deep poverty, according to the Census Bureau. Many people in this situation may not even be able to qualify for alternative financial services because they lack an auto title, paycheck, or anything of value to pawn or sell.

Faring somewhat better are people experiencing relative poverty, who live in households that earn less than 50% of the national median income. They have the basic necessities of life, but compared to others, they appear poor. Although there’s food on the table, it may be difficult or impossible to afford conveniences or comforts of life, such as vehicles, gifts, or vacations. Because resources are stretched thin, people may turn to AFS lenders to pay bills or deal with a crisis.

Poverty is experienced differently depending on whether people live in an urban or rural area. People dealing with urban poverty in the United States may not be able to afford housing in a safe neighborhood with good schools. Other challenges include overcrowding and sanitation. In 2019, 8.1% of urban families were unbanked (without a checking account at a traditional bank or credit union). Alternative financial establishments are plentiful in urban neighborhoods with a high concentration of low-income people.

In rural areas, people with a low income face different kinds of problems, such as accessing high-speed Internet, child care, transportation, and education. Even though there are differences in the challenges faced by those experiencing urban versus rural poverty, the usage of alternative financial services appears similar. For example, payday lending is only slightly more common in urban areas (with 7% of residents having used a payday loan) than in rural areas (6%). Rural households are unbanked at a somewhat lower level (6.2%) than urban ones. Regardless of the kind of poverty people are going through, those with low incomes are much more likely to get a loan with abusive terms than their higher-income counterparts. To make matters worse, if low-income borrowers are unable to repay their loans on time, they face mounting fees and interest and can sink more deeply into poverty.

Single Mothers

Women already have unique financial challenges. Women earn less than men, and are overrepresented in low-wage work. With the financial deck stacked against women, it’s not surprising they make up the majority of payday loan clients.

Single mothers, who often have the day-to-day responsibility for caring for their children, must find ways to keep lights on and food on the table no matter what. They use payday loans to pay for food housing, and monthly bills.

Renters

Renters are far more likely to use payday loans than homeowners. The tendency of renters to use this form of financing exists even among those with a decent annual income ($40,000 to $100,000).

The cost of rent is more variable and unpredictable than that of most mortgages. A landlord can choose not to renew a lease, forcing a tenant to look elsewhere for a similar apartment that could cost more, due to inflation and supply and demand issues. As well, it can be costly to move or store belongings. And, tenants have to come up with a security deposit and at least the first month’s rent.

What’s more, a tenant may have to move suddenly, with many leases requiring just one month’s notice.

Because of these and other reasons, people without adequate savings may turn to alternative financing to keep a roof over their head.

People Who Are Separated or Divorced

Separated or divorced consumers have higher odds of using a payday loan.

They may have to pay off legal and related costs of the divorce itself. They may also have increased expenses of securing a new place to live. As they set up a new life, they must figure out what their housing, utility, and transportation costs are going to be and how to pay for these on one income instead of two. If the couple didn’t build their independent credit histories during their marriage, they might face difficulty getting loans or favorable rates and fees. As well, if their name is removed from joint accounts, they could lose valuable credit history.

For all these reasons and more, separated and divorced people are more likely to use alternative financial services than their married counterparts.

People of Color

Homeownership is a common way to build wealth. But starting with slavery and continuing through Jim Crow, redlining, and undervaluing of property in Black neighborhoods, policies have prevented or limited Black people’s participation in this pathway of wealth creation.

Not only has systemic racism restricted the chance to build wealth and establish credit through homeownership, but it’s also made many people of color distrustful of traditional banks.

What’s more, many people of color live in “banking deserts,” communities abandoned by federally insured banks and credit unions and now host to alternative financial service providers.

Sometimes these AFS providers serve a useful purpose in the neighborhood, but there’s a downside. Because AFS lenders charge much higher interest rates than banks, they deplete the assets of Black families and communities.

Various Age Groups

Young Adults

It’s always been challenging for people just starting out in life to get established. Renting a home and making it livable can be costly. Sometimes a reliable vehicle is needed to get to work. Rising prices and student loan debt make it even harder now for young adults to meet their expenses.

Despite their need, young people are often hindered from getting a loan from a traditional bank due to their lack of assets, credit history, or long-term employment. One third of Millennial (born between 1981 and 1996) and Gen Z (born between 1997 and 2012) Americans had a subprime credit score (below 600).

For these reasons, alternative financial service providers are increasingly lending to young adults who need more money to make ends meet. A 2018 study reported that 43% of Millennials used an alternative financial service in the last five years.

Older People

Older people are often retired and thus on a limited fixed income such as social security or pension payments. Much of whatever wealth they have may be tied up in a home.

Despite having the valuable asset of home equity, older people tend to lack resources for costly or sudden expenses. Their equity takes time to access. They’re especially concerned with how rising health care costs may impact their finances.

The cost of home upkeep and continuing medical care, combined with a low fixed income, can bring some elders to the point of desperation, an emotional state that puts them at risk of financial manipulation or abuse.

And, although financial literacy declines with age, people’s confidence in their ability to make wise financial choices increases with age. The mismatch could lead older people to overestimate their financial knowledge and leave them vulnerable to predatory lending.

Members of the Military

Certain aspects of the military lifestyle may prompt members to consider using alternative financial services. To begin, quite a few members of the military are young. This segment has growing needs but often lacks sufficient financial resources. Young members may have limited financial decision-making experience. They are less likely to have a credit history, thus limiting their borrowing options.

Other features of military life may lead to the use of AFS. Many members are locked into the jobs but have low salaries. Their steady income makes them a decent credit risk for alternative lenders, and their low salaries create a need for extra money.

Another consideration is that sudden and frequent deployments can result in unforeseen costs and the need for quick cash.

Military members’ job security, need for supplemental money, and unpredictable expenses make them ideal potential clients for payday lenders. In fact, a high concentration of payday loan stores is often found near military bases.

The Military Lending Act exists to protect military members from exploitation, but fringe lending to military members continues.

The Unbanked or Underbanked

Unbanked people (about 5.4% in the U.S.) have no checking account at all with a federally insured bank or credit union. Underbanked people (18.7%) do have such an account, but they also rely on alternative lending services such as payday or title loans.

People with an unbanked or underbanked status intersect with other communities who use alternative financial services. Especially, people of color and low-income consumers are more likely than their counterparts to be unbanked or underbanked. In a 2019 survey, the FDIC found the percentage of unbanked Hispanic households to be 12.2%, Black households 13.8%, and White households 2.5%.

People without access to a traditional bank or credit union still need financial services because it’s nearly impossible to use cash for all transactions in our current economy. Alternative financial services address these needs for the unbanked. For the underbanked, AFS providers offer an option seen as more convenient, flexible, predictable, or user-friendly than conventional banks.

Immigrants

New arrivals often struggle to become acquainted with the financial institutions of their adopted country. Common reasons include language and cultural barriers, fear and distrust of banks, and settlement patterns.

Language and Cultural Barriers

Many immigrants aren’t fluent in the language of a new country. Even with assistance, it can be difficult for non-native speakers to understand spoken conversations and written materials involved in traditional banking contexts. A good amount of discussion can be necessary to clarify important details of financial transactions.

Cultural barriers apply as well. People come to a host country from diverse places with unique political and banking institutions. In some countries, comparatively few people do business with banks. Individuals from these nations may not be aware of the advantages of having a bank account in the U.S.

Immigrants are a very diverse segment in America, but even taking into account their country of origin, age, education and income, immigrants are less likely to use traditional banking compared to native-born people.

Misunderstanding and Distrust of Traditional Banks

In some nations, people have relatively little confidence in the integrity of banks to keep their money safe. This suspicion may carry over in their new country.

As well, some new arrivals may not understand their host country’s banking institutions and may therefore be distrustful of then. And, undocumented workers may fear that information shared with a bank could be passed along to immigration enforcement officers.

Compared with traditional banks, alternative financial service providers are seen to offer immigrants a simple and predictable fee, anonymity, convenience, and a welcoming atmosphere.

But perception can sometimes turn out to be inaccurate. In a survey, many Hispanic immigrants overwhelmed by the prospect of applying for an account at a traditional U.S. bank reported that when they actually applied, it was “very easy.”

Settlement Patterns

Many newcomers settle in ethnic enclaves to receive support and make their transition easier. Living with a high concentration of people from the same country makes it less likely someone will have a traditional bank account, so residents are more likely to use AFS establishments.

Referrals to an alternative financial service provider from family and friends carry a great deal of weight among migrants in these tight-knit communities.

Takeaway: Respect for People Doing Their Best

I wrote this post to shine a light on the people who use alternative financial services and their reasons for doing so. I hope the ideas here encourage empathy and compassion.

AFS users are often rational consumers who decide the advantages of using alternative services outweigh the disadvantages in their unique circumstances. Extreme stress and cognitive decline may factor into some users’ decision-making. And, in many situations, users have no other options but to use alternative financial services.

Consumers of alternative financial services may differ in their age, income, ethnicity, or occupation, and sometimes these categories intersect. But most AFS users experience distancing or exclusion from mainstream society and its financial institutions.

Whatever the reasons people use alternative financial services, they’re working within their capacity to address their own needs.

Related Posts

We’re excited to offer further insights into alternative financial services and predatory lending in related posts. Please browse these listings to explore the many sides of AFS:

How Do High-Interest Loans Affect Well-Being?

Exploring Check Cashing: A Search for Economic Justice

Alternative Financial Services: Navigating the Risks of Predatory Lending

Resources

Before you go, take a moment to explore this curated list of resources handpicked to deepen your understanding of the topics raised in this post:

Consumer Federation of America

Center for Responsible Lending

Investopedia Consumer Terms Dictionary

Consumer Financial Protection Bureau

Nerdwallet’s List of Alternatives to Payday Loans in Your State

Notice

This post is for educational purposes only and is not legal, financial, psychological, or any other type of professional advice. You should consult your own attorney, financial advisor, health provider, or counseling professional concerning any issues in these areas of expertise.

Please understand that facts and views change over time. Posts reflect the author’s understanding at the time of the most recent update (2026), as well as the perspectives of external sources for this post. While maintained for your information, archived posts may not reflect current conditions.