Smart Spending

Are Payday Lenders Any Worse than Banks?

Most all agree that fees for payday lenders are exorbitant: $15 for a $100 loan amounts to 391% APR!  What’s more, if the loan can’t be repaid in the next pay cycle, which many times it can’t, then the fees and interest rate go up.

However, anyone who has had the misfortune of having a check bounce, a late fee added to a credit card or paid a reconnect fee would have to agree that the payday lending companies have a point when they make the following comparisons:

  • $100 payday advance with $15 fee = 391% APR;
  • $100 bounced check with $48 NSF/merchant fees = 1,251% APR;
  • $100 credit card balance with $26 late fee = 678% APR;
  • $100 utility bill with $50 late/reconnect fees = 1,304% APR.

These same arguments are ones consumers who have had success in covering their shortages with payday loans use to defend the practice. There is even a study from an economic research firm, Moebs Services, saying it is cheaper, in some cases, to use payday lenders instead of paying overdraft coverage fees.

However, the rub comes when the loan is not paid off in the next pay cycle. Moebs says it takes 3.1 pay cycles to get the average payday loan paid off and often leads people to long-term debt problems.

Although bankers have been barred from charging as much in overdraft fees since the initiation of the Dodd-Frank Act, this hasn’t kept them from looking for other ways to address their shortages in profits, including, according to a Reuters article, charging more for checking accounts.

“As an industry, we have communicated with a generation of customers that this is all free, and there are costs,” Wells Fargo CEO John Stumpf said.

Wells Fargo has eliminated free checking for new customers and will start charging existing customers who do not maintain a $1500 minimum balance or make a direct deposit of $500 each month.

Bank America’s accounts for new consumers cost anywhere from $6 to $25 per month unless certain criteria is met.

All of which is triggering new “Move Your Money” protests as part of the Occupy movement which grew out of frustration with the federal bank bailouts, the spike in foreclosures and a short-lived plan by large banks to impose new debit card fees.

Still other banks have other ideas about how to make up the loss in profits as many of the nation’s biggest banks are offering short-term payday loans—at high interest rates.

U.S. Bank, Regions, Guaranty Bank and Fifth Third Bank are among the banks offering Checking Account Advance and Ready Advance loans.

Like payday loans, these loans are made for two weeks or a month but instead of using a post-dated check, the banks pays itself back when the customer receives their next direct deposit.

Consumer advocates are not happy about this new development.

“Payday loans erode the assets of bank customers and, rather than promote savings, make checking accounts unsafe for many customers,” wrote a consortium of 250 consumer groups, community and religious organizations and law centers in a letter urging federal regulators to halt payday lending by banks. “They lead to uncollected debt, bank account closures, and greater numbers of unbanked Americans.”

Richard Cordray, new director of the Consumers Financial Protection Bureau’s answer to this latest development?  He said he would be watching this practice closely.

If this practice continues, then the answer to the question that began this article has to be, no payday lenders are not any worse than banks.