Traditional Banks Using Payday Loan Methods

Now that the recession has “officially” ended and the federal government has started to crack down on any and all forms of predatory lending, traditional banks are starting to offer services similar to the payday lenders and the quick cash establishments. So for consumers who are not able to obtain an unsecured loan, they may find their banks offering new products with higher rates and fees.

Yup, that’s right. Mainstream banks have smelled the scent of profit from the lending practices of these secondary institutions and are now offering high interest, short term loans that can take months to pay off.
Cash advance centers and payday loans have been offered for a long time in the form of storefronts and shops that offer services to cash your check and issue you a money order. Recently, many well-known and established banks have jumped on board and started offering these types of loans as well.

Here is how it works, you as the consumer borrows money from the bank. Then the bank lends you the cash at a high APR or annual interest rate.

When you get your next paycheck, the bank will repay itself out of your direct deposit account. They will basically help themselves to what you owe them as well as the interest. The bank actually doesn’t even care if you have enough money in your account; they take what they need, even if this means overdraft fees for you!

And the cycle of debt starts again. This means the borrower has to take out another loan so they can make it to their next paycheck.

The banks have used some clever marketing strategies calling these types of loans “checking account or direct deposit advances”

Another name they use to offer these services is “advance checking products” which is really quite similar to payday loans. This is part of their strategy to recoup some of the millions of dollars in lost revenue after the regulations on overdraft fees were passed.

There are many consumer watchdog groups that are vehemently against payday loan practices and warns their consumers to “run like hell” if they see any bank offering this service.

These consumer watchdog groups have reported that the average APR on a 2 week payday loan is over 400%. That makes choosing to borrow money in this fashion a desperate move and financially suicidal as opposed to the average interest of a credit card which is around 12%.
Another sad fact is that people who receive social security as their main or only source of income make up almost 25% of cash advance and payday loan borrowers.
The banks involved in offering these similar types of payday loans have also been cited as being the financial backbone of check cashing stores, where these payday lenders make their loans available.
There is only a matter of time before the federal government and newer agencies like the CFPB (Consumer Financial Protection Bureau) step in and really impose regulations.
There have been so many complaints to consumer watchdog groups that it is only a matter of time before significant regulatory restrictions become the law of the land.