Payday lending isn't exactly the most consumer-friendly industry out there.
Often sought out by low-income consumers who have no other way to close those gaps that appear in everybody's budget from time to time, payday loans often come with extremely high rates of interest that can quickly turn a loan for a few hundred dollars into thousands of dollars, with borrowers forced to take on more and more debt because they can't keep up.
Traditionally, that business had been confined to so-called alternative financial services providers such as payday lenders, check cashing business, pawnshops and other largely unregulated businesses. But in recent years, large banks have started expanding into payday lending.
From the Center for Responsible Lending:
Only four of the nation's major banks are making high-cost payday loans: Wells Fargo Bank, Fifth Third Bank, U.S. Bank and Regions Bank. To their credit, banks such as Bank of America, JPMorgan Chase & Co., Citibank and the vast majority of state and national banks are not making these loans. In fact, a recent survey by the Federal Deposit Insurance Corp., or FDIC, shows that banks offering small loans tend to give borrowers 90 days or more to repay, with an annualized interest rate of 36 percent or less.
By contrast, banks pushing payday loans charge annual interest rates in the triple digits. For a typical 10-day loan costing $10 for each $100 borrowed, the effective annual percentage rate is 365 percent. This type of lending by nondepository payday lenders is prohibited or significantly restricted in 19 states. In some cases, these big banks are undermining state laws by making payday loans even where they have been banned.
Disturbed by this trend, five U.S. Senators -- Richard Blumenthal, Sherrod Brown, Richard Durbin, Charles Schumer, and Tom Udall -- recently signed a letter asking federal regulators to crack down on those large banks and stop the practice.
There's little doubt that consumers who can avoid these types of loans should absolutely stay away. But regardless of whether regulators succeed in pushing big banks out of the payday lending business, this is always going to be a tough issue. While it's hard to imagine a scenario where 365 percent interest is a good deal for a consumer, there is always going to be a market for short-term loans among people who have severely damaged or nonexistent credit.
You can put a cap on interest rates, as many states have, but that necessarily excludes the highest risk borrowers who won't be able to find a legitimate loan at the maximum legal rate. Some of those borrowers will undoubtedly find a way to manage without a loan, but some will inevitably seek out black-market lenders and end up with outcomes even worse than they would have gotten at even the most usurious legitimate lender.
What do you think? Should interest rates on payday loans be capped? Should banks be allowed to make high-interest loans, or should that business stay on the financial fringes?
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