Reverse Bank Robbery

Dec 2, 2011 by

If you live in or have traveled through a low-income neighborhood, you’ve seen payday lending shops, identifiable by their gaudy, carnival-like signage. Payday lenders prey on individuals who are chronically short of cash and make their challenges worse by charging enormous interest for short-term loans.

Payday Loan Example

In exchange for, say, $400 cash today, a payday lender will accept your personal check for $460 made out to the lender and dated 14 days in the future. Before the 14 days have passed, you must pay the payday lender $460 cash—repaying the $400 you borrowed plus the lender’s $60 fee—or the lender will deposit in its bank account your $460 check. If your $460 check bounces, not only will the lender doggedly be “urging“ you to pay up (expect a visit from a very persuasive ‘collection agent’), you’ll also be hit with overdraft fees by your bank.

Paying $60 to borrow $400 for 14 days works out to a 390% annual interest rate. If you were to extend this $400 loan every 14 days for a year, you’ll have paid the payday lender $1,560 to borrow the same $400 over and over again.

Big Banks Muscle Into the Business

Banks like U.S. Bank, Wells Fargo, and Regions Financial now offer the equivalent of payday loans, allowing customers to borrow against their next paycheck, Social Security check, or unemployment benefit, if it’s deposited directly into the customer’s account. Promoted as a service and convenience for customers, a study by the Center for Responsible Lending revealed the real, and predictable, reason banks are entering this highly lucrative business: They’re charging an annual interest rate in the vicinity of 365% based on a typical 10-day loan term.

Wells Fargo charges $1.50 for every $20 borrowed up to $500. U.S. Bank charges its customers $2 per $20 borrowed, also up to $500. And Regions Financial charges $1 for every $10 borrowed up to $500.

So, to use U.S. Bank as an example, if you borrow $100 for ten days you’d pay $10 for the privilege. Annualized, this works out to $365 per year in fees, or an equivalent annual interest rate of 365% on the $100 loan.

When you contrast this with the 0.35% current national average interest rate on 1-year CDs banks are offering, one wonders why banks manage regularly to go broke or require taxpayer bailouts to make ends meet.

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