$400 Surprise Expense Is Enough To Plunge 47% Of American Households Into Financial Emergency


$400 Surprise Expense Is Enough To Plunge 47% Of American Households Into Financial Emergency

There's a raging debate among economists and investors about just how well the U.S. economy is doing. Labor force participation is at all-time lows, so while employment stats look OK, many people have just given up and aren't even searching anymore.

The latest piece of data to suggest that things are not particularly rosy in the U.S. economy is the frightening findings contained in the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2014.

IT found that “forty-seven percent of respondents say they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money.”

While Americans may be feeling better about their finances, as some recent surveys seem to indicate, the statistic that a mere $400 expense would plunge an average household into chaos shows just how under-capitalized American households are. A $400 surprise expense, the survey found, would have to be covered by either liquidating assets or taking out a loan.

“Even prior to the [Great Recession], and more acutely after the recession, it’s true, American households are vulnerable,” said Gregory B. Mills, senior fellow at the Urban Institute, concerning the report. “Depending upon the measure you use, somewhere between one-third and one-half of households are at great risk—as in, they would be unable to fend off hardship.”

Mills sees something even more disturbing than households not having enough savings. The number of households using alternative financial services are on the rise, as we've profiled here, meaning that Americans are turning to non-bank lenders for credit: payday loans, peer to peer lending, refund-anticipation loans, pawnshops, and rent-to-own services.

According to an Urban Institute report, the number of households that used such credit products increased 7 percent between 2011 and 2013. That’s an increase of about 750,000 households total and a significant figure for an economy in recovery.

Families that are seeking credit aren't finding it in mainstream financial institutions. “You used to be able to get small loans for reasonable rates, below 36 percent,” Mills says. “That’s what’s opened the door for more predatory products.”

The type of household seeking alternative financing is also changing.

According to Mills’s research, households looking for non-bank credit with incomes above $30,000 increased from 42 to 48 percent between 2011 and 2013, while those making more than $75,000 increased from 7 to 11 percent over the time period.

“People who are in these [non-bank] situations are not using these forms of credit to simply overcome an emergency, but are using them for basic living experiences,” Mills says.

“Nearly a third of respondents went without some medical treatment in the past year because they could not afford it.”

Late this summer, over 7.5 million Americans will find out whether they will get to keep their healthcare policies.

Here's hoping most of them do.

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