Straight Talk from Al Jacobs
PAYDAY FOR THE BANKS
The headline couldn’t be ignored: “Payday loans get a major rival.” The announcement: The nation’s fifth-largest commercial bank, U.S, Bank, headquartered in Minneapolis, Minnesota, will enter the payday loan business, letting customers borrow sums of $100 to $1,000 for periods of three months. The cost of these loans will be, in addition to processing fees charged, $12 for every $100 borrowed – equivalent to an annual interest rate of 71 percent.
Although major banks made short term loans in the past, a 2013 prohibition by then-Controller of the Currency Thomas Curry barred them from this practice on the basis they trapped many low-income earners into a cycle of high cost debt they were unable to repay. Apparently the Trump administration wants banks back into this line of work, which led the current Controller, Joseph Otting, to rescind the rule this past May. It appears other banks, including scandal-ridden Wells Fargo, will likely follow suit.
The truly insidious aspect of the payday-type loan is not the rare one-time use by a borrower temporarily short of money for an important purpose, but rather the repeated use by the same persons whose lives are perpetually on the edge of financial insolvency. According to a study by the Pew Charitable Trusts, most payday borrowers fall into one or more of the five following categories: those with lower education, apartment renters, African Americans, those earning below $40,000 annually and persons divorced or separated. It’s further revealed most such borrowers use payday loans to cover ordinary living expenses over the course of months, not unexpected emergencies over the course of weeks.
As for the practicalities of these loans, they’re clearly predatory by design. As there are no periodic payments, the lender is invariably compelled to roll the loan over at the end of the period upon payment of another fee. Accordingly, these loans normally result in interest rates exceeding 100 percent. It’s not hard to understand why these cash-strapped payday customers are left with fewer resources than before the loan.
A final thought: The payday loan does no favor to the borrower. Persons with few assets and meager earning abilities are generally better off never borrowing at any time for any reason. The last thing they need is to pay interest to anyone for anything.