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?