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Preying on the poor

By Marcie Geffner · Bankrate.com
Monday, November 8, 2010
Posted: 2 pm ET

Would you pay $2.50 to borrow $20 for one day? A week? A month?

Perhaps if you were desperate enough, you would.

But do the math and you’ll figure out that a $2.50 fee on a $20 loan for 30 days works out to an annual percentage rate, or APR, of about 150 percent. Cut the term to a week or less and that rate skyrockets to an astronomical 650 percent or more.

Compare those rates to the interest charged on other types of debts and the contrast is stark. Say you wanted to get a mortgage of $300,000 for 30 years to buy a house. If you have good credit, you could pay an APR as low as 4.5 percent. Even credit card rates, which are plenty high, typically run in the low double digits.

But wait, you say, that $300,000 is collateralized by the property, and the borrower has to have decent credit, steady income and a down payment, so there is much less risk for the lender.

That's correct, but the $20 loan is virtually risk-free since banks offer these loans to borrowers who make regular direct deposits of public benefit, unemployment or payroll checks into a bank account, according to a statement issued by the National Consumer Law Center, or NCLC. As soon as that deposit lands in the account -- voila -- the loan is repaid.

It's a lousy deal for the borrower and a fantastic return for the bank, even though the fee may seem small on a one-off basis.

A loan product this egregious might seem like a myth or a banker's fantasy. But in fact, the Office of Thrift Supervision, a U.S. Treasury Department bureau that regulates banks, recently shut down just such a product that was offered by one bank that the agency said had engaged in unfair or deceptive practices.

Yet other banks still offer these loans, according to the NCLC.

What's sad is just how predatory these loans really are. Because in truth, only the poorest among us are so financially strapped as to need to borrow so small a sum for so short a term.

That's just wrong, isn't it?

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5 Comments
Debra James
November 16, 2010 at 2:02 pm

Marcie,

I don't understand where the victimization is applied in the mini-loan scenario. People run short on their checks all of the time, and need short-term loans to tide them over. Except in the case of borrowing from family and friends, there isn't any instance that I can think of when a loan has no costs associated with it.

So, are you saying that it would be better not to offer small flat-rate fee mini-loans for people who can't make their check stretch until the next one is deposited? Do you think that the fee is too high? If so, what is a reasonable amount in your opinion? Or, are you inferring that by offering mini-loans that banks are "trapping" people into a cycle frequent borrowing? I would argue against this last point, because it is not the bank's responsibility to manage its customers budget.

If all of my questions miss the point, please explain what you think would be in the better interest of people who need a little extra cash, and apparently don't have savings or a credit card to hold them over until the next check.

Marcie Geffner
November 15, 2010 at 11:28 am

The comparison isn't apples-to-apples because the loan is a debt (i.e., borrowed money) that involves interest while the ATM is a withdrawal (i.e., the account holder's own funds) that involves a fee for the service of using another bank's ATM. If the ATM is an overdraft, then it becomes borrowed money, and another fee is charged. In that case, the comparison is more apples-to-apples, but still, neither of these options is a good deal for the customer.

bri
November 13, 2010 at 5:27 pm

Uhmm isnt this the same thing as ATM fees as said above... I come up with 12.5%?.. 2.50$ charge on $20.00.. The bigger ripoff is atm fees..

Marcie Geffner
November 11, 2010 at 6:34 pm

The best of multiple bad options (overdraft fee, non-network ATM) isn't necessarily a good choice, especially if what seems like a small fee is incurred repeatedly as the borrower gets trapped in a cycle of being just that much short check after check.

Debra James
November 08, 2010 at 7:55 pm

Marcie,

Since you didn't mention how prevalent this practice is, it's difficult to determine to what degree the low-income are adversely affected by this service. The mini-loan fee is significantly less than it would cost to temporarily overdraft a bank account. Given the few options that this customer segment may have, the $2.50 is quite attractive compared to going to a Pay-Day loan place, or paying up to $39 for an overdraft fee.

I think predatory lending is horrible, but this fee doesn't seem too different than the fee that people have to pay for getting money from a non-network ATM. While this a person could possibly withdraw more than $20 (and probably should to make the fee almost worthwhile); these fees can be as much as $5 from the ATM-provider, and another $4 from your own bank. I am pretty sure that this occurs more frequently than mini-loans from direct-depoist benefit/pay checks. I don't know if the frequent users of non-network ATMs are low-income or not, but these fees are basically the punishment that is meted out for poor planning or encountering an unforeseen event that requires money.

From what I can tell by your article, the loan can only be given and the fee applied up to the frequency of deposits. So, if a person gets a direct-deposit check, they can get a mini-loan only when the funds run out in the account. This person cannot get another loan until the outstanding one has been paid with a deposit. Considering that most benefit/pay checks only come once or twice a month (I know, there are some who get paid weekly), the person has limited opportunity to rack up extensive loan fees. However, the non-network ATM users have ample more opportunities to incur more expensive fees and debt, because they also can choose to overdraft their accounts.

Maybe I am not seeing the whole picture, but there were times in the past that I would have welcomed the opportunity to "borrow" $20 against my upcoming direct-deposit pay check for just $2.50. This fee probably would cost less than calling friends/family members to ask for the money, going to pick it up and then pay them back.