Payday loans – they’re not just for sleazy storefront locations anymore. The Los Angeles Times writes that banks and even credit unions have gotten into the short-term, super-high-interest loan market, with dozens of banks, and over 400 credit unions, offering payday loans, or “direct deposit advances,” as they’re now euphemistically calling them.
The way payday loans work is that the lender advances the customer a short-term – usually two weeks – loan which is supposed to be paid back when the customer gets paid. But what frequently happens is that due to the exorbitant interest rates charged, the customer rolls over the loan, getting the lender to extend the timeframe, until he or she can pay back the loan. Unfortunately, this potentially means hundreds
or even thousands paid in interest loans and fees, which has given payday loans the deserved reputation as being ripoff artists.
So now that credit unions and banks are getting into the payday loan business — a 2010 change in banking regulations which increased the maximum interest rate such institutions could charge from 18% to 28% – consumer groups are outraged. The Los Angeles Times reports that 200 “ fair-lending, consumer, religious and labor groups” wrote the federal government last month, asking regulators to stop “this
inherently dangerous product.”
Lauren Saunders of the National Consumer Law Center told the paper that “there are people who wouldn’t walk into a payday loan store but think that if a bank is doing it, it must be safe,” and noted that “if you take a look at these products from a consumer protection standpoint, they raise serious red flags.” Not to mention the credit unions’ involvement – they are perceived to be the institutions that hold consumers’ interests above making profits. Their involvement in offering payday loans is disheartening, to say the least.
One credit union head explained himself to the Los Angeles Times, defending the offering. Steve Weakley is the president of the Vons Employees Federal Credit Union. His institution recently started offering payday loans of up to $750 in value, with a 27.9% interest rate. He said that “even though it’s a higher interest rate than we would normally charge, this is actually a less-expensive alternative.”
While that may be true, that’s like saying that light cigarettes are better than full-flavored smokes; they are both bad for you, with one slightly less bad. Granted, Weakley’s bank does give consumers between one and six months to pay the loan, and the interest is lower than a payday loan, but that still doesn’t mean that it’s a good deal.
Perhaps the saddest thing in the article about payday loans is this praise from Jamie Fulmer who is the spokesman for Cash Advance Centers, the United States’ biggest payday loan company. Fulmer says that the fact that credit unions and banks are latching onto payday loans is a sign that his industry is “doing something right.” He tells the Times, “the services we offer today are now mainstream,” saying that ”we are the new norm.” How scary is that?
Lisa Swan is a Feature Writer for the Compliance Exchange and the Wall Street Job Report. She is also a columnist for The Faster Times and a blogger for Subway Squawkers. Her work has also appeared in the New York Daily News, Yahoo Sports, Huffington Post and the books Graphical Player 2011 and Graphical Player 2010.