A government study finds that banks' deposit advance products frequently trap consumers in a cycle of debt just as payday lenders do.
Deposit advance loans offered by a growing number of banks share the same loose lending standards, high costs and risk that payday loans have, says the Consumer Financial Protection Bureau.
The agency this week released an analysis that examined a year’s worth of payday loans (more than 15 million) alongside data from banks that offer deposit advance products. One of the biggest differences between the two is the name.
The CFPB says they are “similar in structure, purpose, and the consumer protection concerns they raise.” Both are pitched as a way to get by between paychecks. Both offer easy access to quick cash for people with poor credit. Both are small loans that must be repaid quickly.
And both banks and payday lenders generally fail to consider the borrower’s ability to repay. Instead, they just guarantee they get their money back: Payday loans require a personal check or authorization to debit a checking account, while banks just suck the payment out of the next qualifying deposit you make.
Since repayment is usually required from the next available paycheck in either case, the borrower then often needs to take on another loan, especially because of the fees for the loans, the CFPB says. They’re typically $10 per $100 for banks and up to twice as high for payday lenders. The average loan term with payday lenders is 14 days, and with banks it’s 12 days.
Payday borrowers remain indebted to their lenders for a median of 199 days or 55 percent of a year. At banks, it’s more than 40 percent of a year. Sixty-five percent of deposit advance users also end up paying overdraft fees, the report said.