Whether you call it a payday loan or a direct deposit advance, it stands a good chance of wrecking your finances, according to a new study by the Consumer Financial Protection Bureau.
Most people are familiar with payday loans, which are mostly taken out at dedicated storefronts and involve paying a set amount per $100 borrowed on a loan that comes due on your next payday. Because of the substantial interest and the short duration of the loans, the interest rates are shockingly high, with annual percentage rates averaging 339 percent, according to the CFPB study.
Direct deposit advances are similar, except that they're offered at many of the nation's largest banks, and the loan payment comes out of the next direct deposit instead.
The CFPB study, which may set the stage for new rules on lenders, finds that while borrowers appreciate the easy access to credit that direct-deposit advances provide, they often get into trouble with them. Here are some of the more eye-opening statistics.
- Direct-deposit-advance users are much more likely to get overdrafts than nonusers. Almost two-thirds, or 65 percent, of users had at least one overdraft during the 12-month study period compared to just 14 percent of nonusers, despite the fact that some banks tout direct-deposit advances as a way to avoid overdrafts.
- Direct-deposit advances tend to get multiple loans during the year. The median user had an outstanding direct-deposit advance seven out of 12 months in the study period, and the average user had an outstanding balance of 112 days during those 12 months.
- The average payday-loan user paid $574 in fees over to lenders over the course of a year, which is substantial considering more than two-thirds of users made $30,000 per year or less, and more than 40 percent made less than $20,000.
- The median direct-deposit advance user had just less than $3,000 in direct deposited income per month, and users had a median of 30 debit card transactions per month versus 10 for nonusers.
With some of these statistics, it's important to remember that correlation and causation aren't the same thing. For instance, are people who overdraft their checking accounts more likely to need a direct-deposit advance, or are people more likely to overdraft because of direct-deposit advances?
But the study does paint a picture of two financial products that can create a financially dangerous cycle of dependence in borrowers. It seems possible that the CFPB will take some sort of action to limit the negative effects of these products on consumers such as seeking new limits on how often a person can use them or how much banks and payday lenders can charge in interest.
What do you think? Are payday lending and direct-deposit advances dangerous for consumers? Should the CFPB act?
Follow me on Twitter: @claesbell.