Study: Bank payday loans keep borrowers trapped in cycle of debt

[Jul 29, 2011.]

 

Payday loans from banks are keeping some consumers in debt for the long-term, according to the Center for Responsible Lending (CRL). Some banks have begun offering payday loans that allow the money to be deposited directly into checking accounts, competing with traditional payday loan shops.

Very high interest loans

According to the CRL report, bank payday loans carry an annual percentage rate (APR) of 365 percent based on a typical loan term of 10 days. The average credit card interest rate this year was just over 13 percent, while the average interest rate for a personal loan from a bank was 11.47 percent. On average, borrowers of bank payday loans are in debt for 175 days, which is twice the maximum length of time advised by the Federal Deposit Insurance Corporation (FDIC).

Loan fees can add up

The report describes how the bank payday loans work:

The bank deposits the loan amount directly into the customer's account and then repays itself the loan amount, plus the fee, directly from the customer's next incoming direct deposit. If direct deposits are not sufficient to repay the loan within 35 days, the bank repays itself anyway, even if the repayment overdraws the consumer's account, triggering more fees.

Although banks say that their payday loans are different from those at cash advance shops, there really isn't much difference. They both charge exorbitant rates and trap borrowers in a long-term cycle of debt. The cost of a typical non-bank payday loan averages 417 percent APR.

Borrowers on fixed incomes

Payday loans are used widely by low-income consumers. The study also found that almost a quarter of payday loan borrowers receive social security payments, and they were 2.6 times more likely to have used a payday loan than bank customers as a whole.

Should you get a loan?

So what should you consider before borrowing a payday loan from a bank or other lender? First, getting a loan this way should always be used as a last resort. Look for money elsewhere before allowing yourself to get trapped in a cycle of high-interest debt. Second, unless you begin to earn more income or cut your expenses, you are likely to come up short each month and have trouble paying back a payday loan. Finally, if you are really in over your head and need help, consider finding a nonprofit credit counseling agency that can work with you to improve your financial situation.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.