The National Consumer Law Center has just issued their latest report on payday loans titled Stopping the Payday loan Trap: Alternatives that work, ones that don’t.
The report is interesting in that it gives a number of examples of payday loan alternatives that offer small dollar amount loans and lists the corresponding APR.
Anheuser-Busch Employees Credit Union – 254%
Chase Fee-Based Overdraft – 391%
Frist Premier Bank Classic Credit Card – 393%
US Bank Account Advance – 240%
Wells Fargo Bank Direct Deposit Advance – 240-340%
Kinecta Federal Credit Union – 362%
Fifth Third Bank – 240%
University of Hawaii Federal Credit Union – 254%
While the payday loan industry has been slated it is interesting to see how alternatives that consumer may use instead can be more expensive than a traditional payday loan.
The growth in the number of products touted as “alternatives” to payday loans is strong evidence of a growing public recogni- tion of the dangers of payday loans. But to be a true alternative, a loan must be more than just a little bit cheaper than a traditional payday loan. It must be designed so that it can be affordably repaid, over time, by a borrower who does not have a lot of excess income and who can make the payments without falling behind again the next pay cycle.
A number of genuine payday loan alternatives are available, especially at credit unions. Banks should also publicize more widely their reasonably-priced lines of credit instead of encouraging credit-impaired customers to rely on pernicious fee-based overdraft programs that can be even worse than payday loans. Main-stream credit cards, while carrying their own problems and not available for all, are also a viable option for a number of borrowers.
But many loans that purport to be alternatives to payday loans are little or no better than payday loans themselves. These loans are more likely to exacerbate the borrowers’ problems than to help. A slightly lower price and a new name do not make a loan a genuine alternative to payday loans.
As lenders and policymaker explore alternatives to payday lending, they should insist on truly affordable products like ones that meet the criteria discussed in this report: a 36% annual rate including fees, 90 days to repay the loan in manageable installment payments, and either no security or a security method that does not put money for food and rent at risk.
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