Several large national banks have entered a lending arena that was once monopolized by “payday loan” stores – small businesses that offer short-term advances on a customer’s next paycheck when funds run out. .
The loans offer a quick but expensive solution, with annual percentage rates that often translate into over 300%.
Regions Bank is the last major bank to do so. This spring, she joined with Wells Fargo, Fifth Third and US Bank in offering the loans. Banks are moving their services away from term payday loans, which critics say prey on the poor. They have names like direct deposit advance, checking account advance, loan advance or early access.
But, like payday loans, they often have short repayment periods and charge high fees. With these bank loans, borrowers who cannot pay their bills until the next paycheck or deposit usually borrow a few hundred and when the paycheck arrives, the amount owed and the charges are automatically subtracted from their account.
High borrowing rates
The terms are very similar between the four banks. Three of the banks charge $ 10 for every $ 100 borrowed (Wells Fargo charges $ 7.50 for $ 100). And all four will advance only half of the client’s salary or $ 500, whichever is less. Banks that report annual percentage rates (APRs) list them at 120%. But this assumes that the money is loaned for a 30 day cycle (10% times 12 months).
Consumer groups say loans are generally for shorter periods than that – between paychecks that come in every two weeks, for example, which increases the rate. The Center for Responsible Lending has found that the average borrowing period for such a loan is 10 days.
For a 10-day loan with a 10% fee, the APR is actually 365%, depending on how it’s calculated, says Lauren Saunders, chief counsel for the National Consumer Law Center.
“A lot of people get paid twice a month. Even if you get paid monthly, you probably aren’t going to take out the loan the same day you get paid – you will take it out at the end of the month when you run out of cash.
Wolf disguised as a lamb?
Banks do not deny that this is a last resort. They indicate on their websites that these are expensive loans and that if another cheaper resource is available for a consumer they should use it. They say their loans differ from payday loans in that they are cheaper, they offer relationship-based service, and have guarantees in place – such as limits on loan amounts and limits on consecutive months. indebtedness – to keep customers from getting too deep.
“We think they’re very, very different” from payday loans, says Richele Messick, spokesperson for Wells Fargo, which has offered the loans since 1994. “At Wells Fargo, it’s a line of credit that doesn’t is available only to our customers who have an established consumer verification relationship and regular eligible direct deposits. You can’t just get off the street. We don’t advertise it. It is designed to help our customers overcome an emergency.
Consumer advocates say the banks are offering an unwarranted perception of the legitimacy of these loans and trapping desperate people on a conveyor belt of debt. They can also have inherent dangers, according to Saunders, in the form of late fees and direct access to your bank account.
The Office of the Comptroller of the Currency, which regulates national banks, this year proposed guidelines for banks making such loans. But Saunders says, “It will only legitimize a terrible predatory loan by giving advice on how to do it.” She says the banks should pull out of the business altogether.
So what is the alternative?
“Their best alternative is to live within their means and not use next month’s income for that month’s expenses,” Saunders says. But other than that, there are better options, she says, “In terms of affordable small loans, credit cards are typically under 36%. And there are credit unions that have small loans available.
This availability is increasing rapidly. Low-income credit unions have nearly tripled their assets and loans and doubled their membership since 2003, according to the National Credit Union Association. Today, 343 federal credit unions report more than 33,000 small loans, averaging $ 412 each with interest rates just under 21%.
Some say banks are using the high-fee product to make up for what they lose as financial reforms crush them in other areas.
Rochdale Securities banking analyst Richard Bove says there is no doubt that “payday loans” are lucrative for banks, but he also says they provide options for consumers.
“The government has hit banks hard in areas where income was a big part of income,” Bove said. “Overdraft fees in particular may have been 90% of their non-interest income, so the net effect is that banks have to get the money back. Payday loans are a great way to do this.
“We know why banks are doing it, but is it bad for consumers? I don’t think that’s the case, ”he said.
Bove argues that if your choice is to bounce a rent check or other necessities or have your utilities shut down, you might be better off with the paycheck advance in the short term. With the retail and bank bounced check fees combined, “you can pay $ 105 to bounce a $ 100 check,” he says. In this case, the fees to borrow a few hundred for a few weeks from a bank would be much lower.
“You have to weigh the alternative available to the income-stressed consumer when they are forced to make a payment for which they have no money,” says Bove.
Bove says the regions won’t be the last big bank to offer payday loans. “We’re going to see a wave of this,” he said. “Now the federal government will have to figure out what to do when payday loans become one of the most popular products in banking – and that is what they will become. “
See linked: 6 Ways To Avoid Bank Overdraft Fees, Bank Of America Charges Debit Card Customers A Monthly Usage Fee Of $ 5