Payday Loans by Banks are Expensive, Long-term Debt, New CRL Research finds
Center for Responsible Lending
July 21, 2011
Banks regulators should ban these 365 percent APR products especially for seniors on fixed government income
Payday loans made by banks carry sky-high interest rates—an average 365 percent APR—and, though marketed as short-term debt, regularly lead borrowers into long-term debt, new CRL research shows.* For the full report, http://rspnsb.li/nkyx95.
The new report, Big Bank Payday Loans, shows that, on average, a bank payday loan is repaid within 10 days, eats up 44 percent of a borrower’s next deposit, and often creates the need for a subsequent loan. As a result, borrowers stay in debt an average of 175 days, paying over $900 in interest to borrow $500 for less than 6 months.
CRL’s study also found that nearly 25 percent of these payday loans went to Social Security recipients, who were 2.6 times as likely to have used this type of loan compared with other customers. A 365 percent APR worsens financial challenges facing seniors living largely on government benefits, even as more affordable loan products could ease the situation for many. Banks offer these triple-digit interest loans even as they enjoy record-low rates to borrow from the Federal Reserve.
The features and impact of payday loans offered by banks make them the same as payday loans offered by non-banks. Seventeen states restrict payday loans, and a federal law curbs their availability to military families. Yet bank regulators allow banks to evade these restrictions.
“Banks should not be above state and federal efforts to protect consumers from high-cost loans,” said CRL president Mike Calhoun. Bank regulators, particularly the Office of the Comptroller of the Currency and Federal Reserve, should stop banks from making payday loans. A new consumer watchdog, the Consumer Financial Protection Bureau, today assumes the job of overseeing large financial institutions to police against predatory products. One of the CFPB’s first tasks should be to collect data from banks on the use and impact of payday loans, to make that data public, and to use its new authority to halt this harmful product.
* A bank payday loan works like this: A bank gives a customer a loan up to half of his or her monthly direct deposit income or $750, whichever is less. The bank deposits the money directly into a customer's account and then repays itself for the loan amount plus a fee, with funds from the customer's next direct deposit. If deposits don’t repay the loan within 35 days, the bank repays itself anyway, even if that triggers overdraft fees.
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About the Center for Responsible Lending
The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.