Half of Americans can’t afford unexpected expenses. So what if your car needs fixing or your job leaves him home a week early?For millions of people, the answer is usually expensive It is often a payday loan.
But after years of endorsement by consumer groups and new federal regulations, better options are now available. Some big banks now offer micro loans at much lower interest rates than payday loans. Since 2018, six banks — Bank of America, Huntington Bank, Regions Bank, Trust Bank, U.S. Bank, and Wells Fargo — have offered checking account holders short-term loans ranging from $10 to $1,000. , making it easier to deal with economic emergencies and emergencies. do the shopping
“There is no need to go to a branch or wait for an online financier to review your application and transfer the funds,” Pew Charitable Trust wrote in a recent article. report. “Instead, customers complete a simple application through the bank’s website or mobile app, and the bank typically deposits funds into the customer’s existing checking account within minutes.”
Typical interest rates for such products, also called installment loans, can go up to 18%.But it’s less than nearly Average annual rate of 21% Today, they are available on credit cards and are much more affordable than short-term loans sold to people with poor credit, such as payday, car ownership, and pawn shop loans.
Alex Horowitz, who heads Pew’s consumer finance research and authored the lending report, told CBS MoneyWatch that micro loans from banks are about 15 times cheaper than those options.
“A $500 payday loan for four months costs about $500 in fees. Banks charge a $30 fee,” he said. “Low-income families have never had a good option to borrow money, so this benefit is huge. And now they have that option.”
payday loan calculator
The Federal Trade Commission proposes that figure About how fast payday loans can get out of hand. Suppose someone borrows $500 from a payday lender. The loan fee is $15 per $100, so the borrower writes (or authorizes a bank withdrawal) a check for $575, which he is due in two weeks. If two weeks pass and you still can’t pay it off, the lender will add $75 and carry it forward for two more weeks, bringing your total debt to $650. So the cost of borrowing $500 for a month would be $150, a whopping 360% annual rate.
Some states are moving to regulate such loans, with 18 limiting annual interest rates to 36% or less, according to the Center for Responsibility. lending.
You don’t need a financial crisis to drive people into debt. In a 2012 survey, the majority of borrowers said they used payday loans for everyday expenses such as food, rent and utilities. Only 16% said they had an emergency expense, and 8% said they used the loan for “special things.”
“Most Americans don’t have a lot of room for error,” Horowitz said. .
Payday loans have one big advantage. It is a way to get quick money in case of desperation.
“Payday loans are expensive, impossible to pay off, and leave people in debt for much longer than advertised, but they are disbursed quickly,” Horowitz said.
Until recently, banks generally avoided offering microloans. It is not clear whether it is legal for a bank to lend without obtaining a credit report, and the cost of lending small amounts of money to economically distressed customers outweighs the potential profitability. It exceeded.
but then Guidance from financial regulators Some banks started offering such products in 2020, but they rely heavily on automation and customer checking account history. Horowitz said looking at how often customers deposit and withdraw is often a better indicator of whether they can afford to pay back hundreds of dollars than a traditional credit report.
Horowitz noted that the process is so automated that there is no way to request a loan. A person logs into their bank account and is presented with options if they are eligible to apply for a loan. “Banks want to show these loans to qualified people, not unqualified people,” he said.
Some credit unions offer similar products called Payday Alternative Loans. Still, Horowitz said tens of millions of Americans don’t have the option of affordable borrowing in a pinch, and Pugh said he’s urging more banks to offer this option.
“This should be a ubiquitous product in the banking system,” he said. “Millions of borrowers could save billions of dollars, and loans like this could replace many of the higher-priced loans being made.”