Payday lending businesses across the country has been lambasted by a lot of critics in recent times for charging high interests. The general public has been made to believe that you should stay miles away from them because taking a short-term loan from them could land you in trouble, as you are likely to fall into a debt trap. Millions of people across the United States, though, continue to approach these businesses when they are a little short of cash, and need funding for the last few days of the month.
There have been voices of dissent also as some critics, accountants, former bankers, and lawmakers have pointed out that there is a real requirement in the market for payday loans. A large section of the population, particularly those who don’t have a perfect credit score have nowhere else to go. But these voices have been aberrations. Most critics still make us believe that payday loans are bad.
A few alternatives to payday loans have come up now and then, but none of them have worked. For all practical purposes, there is simply no alternative to payday lending anywhere in the United States at this time.
A New Study Reveals the Shocking Truth
Now, a new study shows how bank overdraft charges are way higher than payday loans. In fact, these charges could even be up to eight times higher according to the findings of this study. “Which?”, a consumer group that reviews products and services, says that consumers who borrow a loan for 30 days from banks for say an amount of $100, will often have to end up paying $180 because of the high overdraft fees. With payday loans on the other hand, it comes to $124 maximum.
Banks make us believe that their overdraft programs are a service offered to clients. It covers bounced checks and allows customers to overdraw their accounts. However, according to the findings of Which?, the service is definitely offering a bad deal for people. This is a serious cause for concern, which has not been adequately highlighted. Most people who are critical of payday loans won’t comment on these bank charges.
A large section of the population is being affected by these bank overdraft charges. In fact, as per the statistics with the CMA or the Competitions and Markets Authority, one in five bank account holders go for unarranged overdrafts, which means that 20 percent people with bank accounts have to live with these extremely steep bank charges.
Interest Rate in Overdraft Plans Can Be Really High
Unlike other credit lines, where the annual interest can go up to a maximum of 20 percent, in the overdraft plans where a flat fee is charged for processing the overdrafts, the interest rate when calculated over the entire year can be as high as 1000 percent. Also, unlike revolving credit where customers can repay their debt when they are able to, here, they have to make sure that their balances are back in the positive in just a few days. Most traditional credit lines are limited to thousands of dollars, but the overdraft plans are limited to between $100 and $300. The banks will begin to bounce the checks again once the overdraft is expended.
How Banks Are Not Serving the Public Interest
Firstly, most banks and other conventional lending agencies won’t usually offer small-dollar loans to their customers because they are interested in larger sums, even though most people are just a little short of cash and they have the regular income to pay it back after payday next month.
Secondly, these lenders are not keen about the short-term. A loan for a couple of weeks simply does not appeal to them. They are more interested in long-term big money loans such as mortgages, car loans, and such others.
Thirdly, the banks will almost always overlook individuals with poor and sometimes even those with an average credit rating. This means they are shutting out so many people without a perfect credit score, those who actually need financial help the most.
Banks and other conventional financial institutions only look at their own interest. The payday lenders are businesses too, and thus must see to their interest, but these companies are carrying out their social commitments, where the banks fail miserably.
What the New York Times is Saying
It is not just the consumer group Which?, even the New York Times is now saying that these overdraft charges have become one of the most beneficial profit-making schemes of the banks. The NYT is only citing what the consultants are saying, of course, and there is statistics prepared by government bank regulators to back up this claim.
Here is one data, for instance, which will surely shock most people. Washington Mutual, which is the seventh biggest financial institution, and also a big promoter of overdraft protection, last year made more than $1 billion from overdraft fees by charging their customers. And that too all in the name of offering a benefit to their customers!
Industry analysts are claiming that overdraft plans that include fees for each overdraft are actually high-interest loans for working-class customers.
In payday loans, there is just a regulated flat fee for the direct cash that consumers receive in their bank accounts. Bank overdraft programs, on the other hand, work automatically with debit cards and checks. To make matters worse, the consumers often do not even realize that they have overdrawn their savings and checking accounts till the time the bank notifies them.
Many banks, love such a situation because it lets them prosper at the cost of the consumer.
What the Consumer Federation of America Says
Jean Ann Fox, who is the director of consumer protection at the Consumer Federation of America recently said this while speaking on the matter, “Some banks are looking at the fact that some consumers barely make it from pay day to pay day and have a very low balance, and instead of offering them a beneficial service, they are charging their customers bounced-check fees to take advantage of the situation”.
Results of the Federal Reserve Study
According to the findings of a Federal Reserve study that was carried out recently, the problem is getting worse. That’s because, banks in the United States have hiked their overdraft fees by 24 percent from what they used to charge between 1997 and 2001.
Also, the banks are using all means to ensure they gain the most. For example, they use advanced software programs to process the largest debits and checks first, so if your account is going to be negative requiring an overdraft, the bank can charge overdraft fees on a higher number of smaller transactions.
When you add the $15 per of average merchant penalty for each returned check, five overdrafts for $200 can add up quickly to become $375 including charges. With payday loans, on the other hand, the fee would just be between $45 and $60 for a loan of $200.
It’s not us, the payday loan industry, which is saying these things. These findings have come up in the investigations carried out by the Federal Reserve, Consumer Federation of America, Which?, and other independent analysts. There is enough evidence to prove that the payday loan industry is looking after consumer interest better than the banking business. The tide is turning. Many critics too are beginning to believe this.
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