Although many Americans experienced some sort of negative impact to their finances during the COVID-19 pandemic, those who are struggling financially may have greater difficulty repairing the damage the health crisis caused.
The Financial Health Network, a Chicago-based nonprofit, found that Americans struggling with financial health — and Black, Latino and low- to moderate-income (LMI) households especially — spend more of their income on fees and interest for financial services than those in financially healthy households.
In particular, the organization's FinHealth Spend Report 2021 revealed that financially coping and vulnerable households — described as "those who struggle to spend, save, borrow and plan" — made up 84% of spending on all fees and interest for financial services last year (a total of $255 billion), despite only representing 64% of the population.
And although financially vulnerable households made up 14% of all survey participants, they accounted for 24% of all fees and interest paid.
Households that struggle financially spend more on interest and fees
The Financial Health Network analysis also showed that financially vulnerable households spent, on average, 13% of their annual income on fees and interest before they use the remainder for other necessities like housing and insurance. In comparison, the following spend much less on average for the same expenses:
- Financially coping households: 5% of their annual income
- Financially healthy households: 1% of their annual income
For financially vulnerable and coping households, much of this spending comes from credit cards and auto financing. In fact, these households spent $90.5 billion in interest and fees from general purpose credit cards alone, while auto loans and leases made up another $85.3 billion.
In addition, this year's FinHealth Spend Report found that LMI households — households with an income below 80% of their area's median income — spent $127 billion in interest and fees on everyday financial services.
Compared to higher income households, which spend on average about 3% of their annual income on fees and interest, LMI households spend about 7% of their income on the same. LMI households are also 1.8 times more likely to see overdrafts on their accounts compared to non-LMI households.
Black and Latino household incomes hit harder by additional expenses
Previous surveys have revealed the extent of the coronavirus pandemic's impact on the financial health of people of color.
Recent findings from T. Rowe Price, for example, showed that Black and Latino families were twice as likely to reduce than to increase savings contributions to retirement and college funds during the current health crisis. Another report from Harvard University's Joint Center for Housing Studies discovered that Black homeowners saw higher mortgage and mortgage refinancing rates than white homeowners with similar or lower incomes.
In a similar manner, the FinHealth Spend Report also shed some light on the coronavirus pandemic's financial impact on Black and Latino households.
Black and Latino households spent a total $101 billion on interest and fees last year — making up on average 6% and 5%, respectively, of these households' total incomes. Meanwhile, white households only spent 3% on the same.
The report also found that, compared to white households:
- Latino households were 3.1 times more likely to use payday loans
- Black households were 2.7 times more likely to use pawn loans
"Ideally, financial services can help individuals and families manage their financial lives and build better financial health, but the data shows those least able to afford them are disproportionately shouldering the costs," said Financial Health Network president and CEO Jennifer Tescher.
"This exacerbates the financial distress felt by many families and contributes to a well documented and growing financial gap in this country."
Methodology: The FinHealth Spend Report 2021 relied on analysis of primary and secondary data for its findings.
Primary data was sourced from an original survey conducted between Nov. 2 and Nov. 30, 2020. The sample selection was made up of active respondents from the Understanding America Study, a nationally representative internet panel from the University of Southern California's Dornsife Center for Economic and Social Research. All 4,090 survey participants were noninstitutionalized U.S. residents ages 18 and older.