High-interest loans through checking accounts keep customers in long-term debt
What can you do?
A new CRL report describes how banks are adding payday loans to their arsenal of predatory loan products. These loans drain cash from cash-strapped Americans, often social security recipients.
The banks are making loans to their checking account customers based on the customer's direct deposit paycheck. The fees are high and the entire principal is deducted on payday, which, like payday lending, forces most customers into a long-term cycle of borrowing that systematically strips them of their funds.
The report finds:
- Bank payday loans are very expensive, carrying an annual percentage rate (APR) of 365 percent based on the typical loan term of 10 days.
The fees for this product may seem reasonable at first glance, but when you do the math, you find the loan is much more expensive than alternative credit products. As compared to the interest rates outlined in the table below, the average credit card interest rate in 2011 was just over 13 percent annually, and the average personal loan from a commercial bank was 11.47 percent.
|Cost of Bank Payday Loan|
|Length of Loan||Annual Percentage Rate|
|10 days (average length)||365%|
- Short-term bank payday loans often lead to a cycle of long-term indebtedness; on average, bank payday borrowers are in debt for 175 days per year (twice as long as the maximum length of time the FDIC has advised).
Our analysis found that 44 percent of a customer's next deposit goes toward repayment of this type of bank payday loan. This virtually forces the customer to borrow again to make it to their next payday, which costs them another big fee. (Sound familiar? See our research on predatory payday lending.)
The FDIC has advised the banks it oversees not to keep customers in this high-cost debt for more than 90 days of the year. But on average, bank payday loan borrowers are caught in this cycle for 175 days.
- Nearly one-quarter of all bank payday borrowers are Social Security recipients, who are 2.6 times as likely to have used a bank payday loan as bank customers as a whole.
We find that on average, when a Social Security recipient has an outstanding bank payday loan, the bank takes a third of the borrower's next deposit to repay the loan and fee. For seniors living largely on government benefits, a 365 percent APR loan worsens financial challenges that a more affordable loan product could have eased.