Across the country, countless Americans have trouble making payments on housing, auto loans, and healthcare, as well as affording food and other basic necessities. Many people throughout the country are strapped for cash, and the payday loan industry is devouring what little savings they have left.
Although they’re advertised almost anywhere you go, most people don’t know how payday loans work. When someone needs cash to pay a bill or cover an unforeseen expense, a lender can give them the funds they need to meet their obligations. As with most loans, borrowers will pay back the amount they received plus interest. The caveat with payday loans, however, is that the interest rates applied are absurdly high; often as much as 200-300%.
Very few borrowers seem to appreciate the gravity of an interest rate that high – and even those who do often feel they have no other recourse. By the time the payment on a loan is due, the added interest typically exceeds the balance of the borrower’s account; they now have no money in the bank, which is the reason the loan was taken out in the first place. By handing out more cash to cover the original debt plus late and overdraft fees, payday lenders continue to rope in long-term customers. These small, yet high-interest payday loans, or “deposit advances,” as big banks have come to call them, trap consumers in a perpetual cycle of debt that is nearly impossible to escape.
You can find a payday loan almost anywhere – on the internet, in strip malls, and now from your trusted banking institution. Since banks have easy access to the accounts you hold with them, they have no problem dropping you cash when you need it, and then taking it back plus interest and fees whenever they want. Across the country, citizens are falling into financial turmoil as they struggle to pay off one advance deposit loan with the next one. For many, it doesn’t seem like there is a way out.
Enter the federal government. Following the lead of at least 15 states, regulators announced a new set of guidelines last week that would apply to banks that make payday loans. The regulations limit deposit advances to once a month, and banks wouldn’t be allowed to issue a deposit advance across two consecutive months to the same borrower. The regulations also require banks to determine a customer’s ability to repay a loan by reviewing at least 6 months of banking activity.
A study by the Consumer Financial Protection Bureau (CFPB) states that more than 50% of borrowers took out loans of $3,000 per year or more, and were in debt about 40% of the time. Of these 50%, more than 50% took out another loan within just twelve days of the first. On average, borrowers took out 10 loans each year and paid $458 in fees.
The new guidelines will apply to banks regulated by the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Of the six big banks that currently offer deposit advances, Wells Fargo, Guaranty Bank, US Bancorp, and Bank of Oklahoma are subject to the rules limiting the frequency of loan issuance. Banks Fifth Third and Regions, which are regulated by the Federal Reserve, are not subject to the new rules, though they could see pressure from the CFPB to address these issues in the near future.
Payday loans are facing scrutiny from the law outside of banks as well. One of the nation’s largest lenders, Cash America, just paid a $19 million settlement to the CFPB for robo-signing documents and charging members of the military and their families up to 36% interest on loans, in violation of the Military Lending Act. While there are certainly many instances where a small, immediate cash loan can help someone out of a pinch, it’s clear that profit-making is the top priority of these lending institutions, and they are willing to break laws and place financial strain on everyday Americans to achieve that goal.
Aside from educating yourself of the dangers payday loans may pose to your account balance, Green America urges you to take it a step further. By Taking Charge of your Credit Card, you can remove support from the big banks that use deposit advances to prey on struggling Americans. You can shift your support to a community development bank or a local credit union, which have the dual benefits of offering trustworthy financial products AND supporting projects that benefit your community directly. Click Here and let the big banks know that you don’t approve of their predatory lending techniques today.