Some of the biggest banks in the US are providing short-term loans at obscenely high interest rates, so much that certain consumer groups say that they are no way less of a torture as payday loans are. The matter is clearly divided between certain consumer group criticizing payday loans and products on the similar lines while other maintain such products are a boon rather than curse, especially when it comes to sourcing funds for emergency situations.
The trend now is Checking Account Advance or Ready Advance Loans, which are modeled on payday loans, but are offered by leading banks across the country including Wells Fargo, U.S.Bank, Regions, Fifth Third Bank and Guaranty Bank. Like payday loans, the advance loans provided by these banks are for two weeks or a month. But unlike payday loans, where you pay back by a post-dated check or a direct debt; in a checking account advance; the bank pays itself back directly from the customer’s checking account.
Consumer advocates have pointed out that these advance loans are not better than payday loans, because they also carry high fees that borrowers find it tough to pay back by the time the loan due date is near. Putting pressure on the federal law-makers to stop payday lending by banks, a consortium of 250 consumer groups, religious affiliates and community-based organizations pointed out that payday loans actually make checking accounts unsafe for customers because their assets are stripped down and the saving habit is curbed. They have stated that this can further lead to bank account closure, uncollected debt and unbanked customers. With banks commercially interested in checking account advances which are on similar lines, they are definitely setting a dangerous precedence, these groups observed.
The checking account advance offered by banks is given for an average period of 10 days with a fee of $10 per every $100 borrowed. This means the APR comes to 365 percent, and consumers are struck in the debt cycle for an average period of 175 days per year. Compared to this, payday loans that are offered by non-banks are given for an average period of 14 days with $16 average fees per $100 lent. This is equivalent to an average APR of 417 percent. A study shows that consumers are struck in the loan trap for an average cycle of 212 days per year.
Banks are endorsing checking account advances stating that they are more credible compared to payday loans. They stress on the fact that their fees are lower than the traditional payday loans, and that applicants do not have to go through a verification procedure because after all, they are their checking account customers. Payday lenders also report repayment history to credit bureaus, so if you are one of the person who pay back on time, the move can improve your credit rating. The banks have reported that people who have used their loans have given a high satisfaction rating. The government’s new consumer watchdog, the Consumer Financial Protection Bureau is not exactly jubilant with the claim and is keeping a close watch on the processes being followed by the banks. One thing is clear here, the customer has a lot of options for short-term borrowing compared to what he had, years ago; and some disciplinary behavior in financial management can always help.