Finally, the big banks have jumped into the unsavory world of payday loans.
These loans, which were once the preserve of cornerstore check cashing outfits, are proving irresistible to banks seeking to spruce up their profits by any means necessary.
Of course, with the new market focus has come a new name. That new name is the elegantly-styled “direct deposit loans“, not the loanshark-sounding ‘payday loan’.
Of course, the one thing they have in common is the exorbitantly high interest rates charged by the check cashing stores and the banks.
Take for example, the $16 that might be charged to borrow $100 from a traditional payday loan vendor. If the loan is due in two weeks, that is an effective interest rate of 417%.
Such loans are disproportionately used by the poor and often help to mire them further in debt, hence their unsavoury reputation. However, they are a rich source of new extra revenue for banks, especially after rules restricting overdraft charges and fees for debit cards were introduced by Congress.
The banks of course, say they have instituted safeguards to prevent overreliance by customers, but we’ll have to see how that works out in practice.
Admittedly, the banks will be charging lesser rates than their neighborhood cousins, at about $7.50 per $100. However, this still works out to 261% annualized interest.
US Bank, Wells Fargo and Regions Financial are just the leading edge of banks entering the payday loans market.
Our advice is caveat emptor – buyer beware. Credit cards are way less expensive, as are bank loans.
Of course, many who use payday loans may not qualify for these other forms of credit, so better budgeting and financial practices are useful to avoid entering the market for these loans.