More Banks Offering Payday Loan-like ProductsLosing profits due to new regulations and a slow economy, traditional lenders have begun offering
payday loan-like products.
When the financial crisis spawned distrust in traditional financial institutions, and forced banks to tighten their lending restrictions, payday lenders were there to fill the void for struggling low-income consumers.
Facing new regulations on debit card interchange rates and overdraft fees, banks are looking for ways to make up the lost profits. While many are forecasting that banks will increase fees on products like checking accounts, many banks and credit unions across the country have already started offering short-term credit loans by a different name: direct deposit loans.
A direct deposit loan is similar to a payday loan, but the principal gets deducted from the customer’s next direct deposit check in order to pay back the loan.
The
Center for Responsible Lending has already found that this lending model leads to clients taking on loans for an average of six months in order to pay off the original principal.
Banking officials argue that this product is only intended as a last resort and that they have safeguards in place to protect their customers – like only allowing customers to borrow against half of their monthly income.
For people living paycheck to paycheck, and thus need to fall back on this type of loan in an emergency, having half of their monthly income taken away can have extended consequences that would persist for several months.
Since these loans require the customer to have direct deposit set up, and thus an active bank account with that bank, there is no application process for direct deposit loans. The CRL fears that such easy access to quick cash will lead to customers using these loans casually.
Thus far big banks like Wells Fargo, and
Austin-based Regions Bank have refused to disclose the interest rates related to their direct deposit loans.