Payday Loans Go Mainstream

by Mercator Advisory Group 0

Short-term/small dollar consumer loans, always controversial due to their high cost, are being highlighted in the press as a revenue alternative for major banks adversely affected by reductions in debit revenues.

A report from the National Consumer Law Center states these loans, like payday loans, won’t be cheap.

“Recently, Regions Bank became the fourth large bank to start offering 300% APR or higher payday loans, following Fifth Third, U.S. Bank and Wells Fargo,” the report reads. “Fiserv and other bank consultants are encouraging banks to offer payday loans as a way of augmenting overdraft fee income.”

The report predates Bank of America’s September announcement of its debit card fee and the ensuing national protest, Bank Transfer Day, Nov. 5, which encouraged customers of large banks to move their accounts to local banks and credit unions.

In addition to cost, payday-type loans are highlighted because consumers can be trapped in a borrowing cycle if safeguards against excessive use are not built in to the products.

The Center for Responsible Lending states that because the interest rates are high, and the entire principal is deducted on payday, it forces most customers into “a long-term cycle of borrowing that systematically strips them of their funds.”

As well, banks can now offer 300% payday loans to military service members by using a loophole in the law that normally limits military loans to 36% APR, according to the NCLC.

The article goes on to suggest, as others have, that banks will push credit cards on consumers as a more profitable alternative to debit cards. Mercator’s consumer research indicates that loyal debit users are likely to stick with debit, and are unlikely to switch to credit cards, due to their concerns about building their credit balances. Most consumers still have access in their markets to “free” checking accounts with debit cards. Consumer revolving credit balances are continuing to decline nationwide, suggesting many consumers continue to avoid using their credit cards if they so choose.

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