The U.S. Consumer Financial Protection Bureau last month started seeking public input on payday loans, notorious for their sky-high annualized interest rates. In recent months, the payday loan market has been exposed by some pretty big newspapers about their un-ethical interest rates. One article was published on the Baltimore Post Examiner which highlighted the struggle financial regulators are having on tracking the loans online as it’s all done over the internet.
But consumers may not know that big traditional banks – not just the corner payday store – offer these types of short-term cash amounts for their checking account customers. However, many people don’t understand what a payday loan is and it is important you complete some research before taking one out. If you need cash now, why not check out a website like investmentwatchblog.com which highlights the advantages of a payday loan and can point you in the right direction. Other people may prefer to complete research elsewhere and many more may prefer to stick with a bank when lending money. The important thing is you find the best solution for you and you do your research first. Even when using a bank, different rates can apply and you need to make sure you understand the paying back process.
Bank “payday” loan rates can be as exorbitant as their storefront counterparts, carrying an annual percentage rate (APR) of 365 percent based on the typical loan term of 10 days, according to a study by the Center for Responsible Learning that has recently gotten the attention of the CFPB.
The CRL study found that typical bank “payday” loans – banks don’t refer to them as such – are outstanding for only 10 days. But banks typically charge $10 per $100 borrowed, amounting to a 365 percent APR.
Even when the loan was outstanding for a full month, the APR of 120 percent is significantly more expensive than alternative credit products, such as credit cards or consumer finance loans, the CRL study found.
In comparison, the Federal Reserve reports that the average credit card APR in the U.S. was about 13 percent in the fourth quarter of 2011. Personal, 24-month commercial bank loans carried a 10.5 percent annual rate in the same period.
CRL also found that banks allow loans of up to half of a customer’s monthly direct deposit income, or up to $750, whichever is less.
“As a result, it is not surprising that CRL’s analysis found 44 percent of customers’ next deposits go toward repayment of their loan,” CRL said. “This large proportion no doubt contributes to the long-term debt cycle experienced by many bank payday borrowers.”
The CFPB will review input from the public on both bank and storefront payday lenders as they review existing regulations pertaining to the short-term cash business.
“We recognize the need for emergency credit. At the same time, it is important that these products actually help consumers, rather than harm them,” said CFPB Director Richard Cordray. “Now, the Bureau will be giving payday lenders much more attention.”
The CFPB will likely address existing guidelines to payday lending established by the Federal Deposit Insurance Corp. in 2005.
The FDIC found that this justification for higher interest rates – that borrowers remained in these loans for a very short time – was not valid when payday loans because the cycle was repeated many times.
The FDIC advised that if a borrower had payday loans outstanding for any more than 90 days in a one-year period, the product was not being used as short-term credit, and further payday loans to the borrower were inappropriate.
The FDIC has guidelines for responsible for bank payday loans, which include reasonable interest rates and affordable installments that reduce loan principal over time.
Along the same lines, the National Credit Union Administration (NCUA) recently advised that short-term loans more expensive than 18 percent APR be limited to three every six months
According to the FDIC:
When a customer has used payday loans more than three months in the past 12 months, institutions should offer the customer, or refer the customer to, an alternative longer-term credit product that more appropriately suits the customer’s needs. Whether or not an institution is able to provide a customer alternative credit products, an extension of a payday loan is not appropriate under such circumstances.
Table from the Center for Responsible Learning:
|Cost of Bank Payday Loan|
|Length of Loan||Annual Percentage Rate|
|10 days (average length)||365%|