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Banks and Credit Unions Move Into Payday Loans
March 20th, 2012
A tough industry to control
A fixture for years in poor, working-class neighborhoods, payday loans are increasingly being offered by local banks and employee credit unions, triggering concerns by consumer groups that more Americans will be trapped in high-interest loans that could take years to pay off.
The Payday Loan
Conventional payday loans from storefront operations provide workers a two-week advance of as much as $500 on their paychecks for a flat fee or an interest rate that doesn’t sound too extreme on the surface. But many people can’t repay the loans when they come due. Instead, they simply roll the loans over from payday to payday, or take out new loans to cover the old ones, piling on additional costs that can result in interest charges of 300 percent or more over the course of a year.
Mushrooming
More than two dozen regional and community banks now offer versions of these loans, most starting their programs since 2007. The biggest increase, however, has come at credit unions. Nearly 400 of them now are in the market, attracted by a 2010 change in regulations that boosted the maximum interest rate on payday loans to 28 percent from 18 percent.
The banks
The move by banks into payday lending, or direct deposit advances, as many call it, led about 200 groups to write to federal regulators last month and call for prompt action to stop “this inherently dangerous product.”
A Quarter of Americans Have Turned To Payday Loans
November 12th, 2011
Research Shows that Online Payday Loans are One of the Fastest Growing Segments for Lenders
It’s all to do with emergencies: New tires for the car. An unexpected trip to the emergency room. An afterhours call to an electrician to fix a blown circuit in the house. These are just a few of many examples of what can and does happen in an average month to many people. For those who are living paycheck to paycheck, meaning a significant number of Americans, these situations are not only stressful, they can also figuratively break the bank.
Budget
Unbudgeted expenses use up money that was earmarked for groceries or other living expenses, and if payday is not in the immediate future, it can be pretty difficult to make it until the next paycheck comes in. Traditionally, people needing extra money would head to their local bank to ask about a loan, which would involve a lengthy and time-consuming application process. In the case with all lenders who handle payday loans, certain restrictions do apply: for example, applicants must be typically 18 years or older with a checking account, a phone number, and a steady income of usually at least $500 to $1,000 a month. For people who meet the qualifications, payday loans tend to go very smoothly. Compared to a traditional bank, a payday lender has no interest in why a borrower needs the money.
Collateral
A bank will often require collateral and the reasons for the loan. Even then a bank can decline a loan request. A payday lender isn’t as difficult to work with and won’t ask about a borrower’s reasons for needing a loan. For clients who would like to try for a payday loan, but are feeling unsure about the process, statistics have shown that they are in good company. As of 2009, a federal government study showed that about 25 percent of Americans had consulted a payday lender or similar service in the past year.
Banks Muscling In On Payday Loan Territory
October 26th, 2011
Look before leaping into high interest loans says consumer credit counseling agency
According to the St. Louis Post-Dispatch several St. Louis area banks have moved into the payday loan business, including U.S. Bank, Regions Bank and Fifth Third Bank.
Requirement
A requirement of the banks is that the person taking out the loan has a checking account with them and has direct deposit and automatic withdrawal for the loan, said Thomas Fox, community outreach director for Cambridge Credit Counseling Corp., a nonprofit agency. The banks are competing with storefront payday loan and check cashing services, charging somewhat lower rates. They charge an upfront fee for a small loan of $100 to $500, which usually is scheduled to be paid off in one to three months.
Take counseling first
Fox suggests contacting a nonprofit consumer credit counseling agency before taking out a payday loan from a bank or a payday loan establishment. “Our goal is to empower people to take control of their finances and find ways to help themselves,” Fox said. “We do a full financial analysis, help them restructure debt, find alternatives.” To contact Cambridge, call 1-800-235-1407. To contact other nonprofit credit counseling agencies, see the Association of Independent Consumer Credit Counseling Agencies website, or call the AICCCA at 1-866-703-8787.
“Advance” loans
Often the payday loans cycle customers over month after month with loan after loan. The banks, which call them “advance” loans, are a bit better but still charge high rates, Fox said. “The banks will charge about $7.50 for a $100 loan,” he said. “It doesn’t sound like much, but when you annualize it, that’s 261 percent interest. That’s less than the payday loan places, but it’s still extremely high.”
Center for Responsible Lending
According to the Center for Responsible Lending, turnover customers make up 76 percent of a payday loan’s business. The customer often can’t meet payments at the end of the month and is forced to take out another loan. “The banks typically will cut you off from more borrowing after a couple of months, so they are attempting to control that,” Fox said. The banks also limit how much a person can borrow, he said.
“One in four of the borrowers is on Social Security,” he said. “That says something right there.”
Middle-Income Earners Also Moving To Payday Loans
August 19th, 2011
Things are moving from bad to worse
As the economy starts to slide again and jobs and pensions become more and more problematic, many middle-income earners are starting to struggle financially. Payday loans are becoming an increasingly popular source of money. But is this the best option for a short term loan?
Prices on the rise
To aggravate financial woes, prices are on the rise across many staple household needs, including gas and electricity, petrol and food, and many families face falling into debt as they struggle to keep up with their outgoing payments. And it’s not just low-income families who are struggling, it’s middle-income families too. According to “This is Money”, around 57% of payday loans provider Instant Loans Direct customers, are people earning between £25,000 and £50,000, above the national average wage.
Maxed out credit cards
When credit cards are maxed out and credit ratings unattractive to lenders, payday loans can appear attractive as a short term loan. After all, for what seems a small amount of money you can borrow a few hundred dollars for a few days to get you out of a hole until payday comes. Few credit checks are made and you can get the money into your bank account very quickly.
The issue
The issue is, for this convenient access to money, interest rates are very high, and can be equivalent to over 1,000 per cent per annum. If a loan is not repaid in the agreed time, the charges can be significant and you can easily find yourself with further debt that you have little chance of being able to repay.
The Industry
The payday loans industry is already worth over £1 billion and growing rapidly as more and more people need quick loans and are either denied access to or are not prepared to approach conventional lenders, such as banks and building societies.
The issue is though unless you address the underlying problem of your outgoings exceeding your income, you will find yourself in the very same position next month. In fact it’s likely to be worse in that you’ve added to your outgoings by the cost of your short term loan.
Budget
Can you set a budget so that your income exceeds or at least equals your outgoings? Can you save money anywhere? If not, or you can’t totally balance your money, is there another option you can use for a short term loan? For example do you have any assets, such as a car, watch, jewelry or perhaps some art, which you can use to secure a loan? In such a way you would be making your assets work for you. You would still need to pay the cost of the loan but in a worse case scenario you can sell your assets to cover the loan, or more positively, get your assets back once you have improved your financial position with your better money management and sticking to your budget.
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