Liz Weston: Would a bank payday loan be any safer?
A "safer" payday loan sounds like an oxymoron. Critics have branded these notoriously high-cost loans as debt traps that cause borrowers to go ever deeper in the hole.
Thanks to a recent regulatory change, it now may be possible for banks to offer small, short-term loans that could be a lot less dangerous for borrowers. Whether banks will actually do so remains to be seen.
The right moves could save low- and moderate-income Americans billions of dollars a year. The wrong moves could create yet another sinkhole for those who are already struggling.
HIGH RISK FOR BORROWERS — AND LENDERS
Payday loans are advertised as a way for people to meet a short-term cash crunch in a hurry. People borrow relatively small amounts, typically
The problem is that despite the high cost to borrowers, lenders can't make much profit, if any, on small loans if they have to do expensive underwriting such as credit reviews and income verification. But loans made without regard to someone's ability to repay can be dangerous, since people wind up extending the loans and paying a fortune in fees. The average payday loan customer paid
—Allow borrowers to pay off their balances over several months as installment loans, rather than requiring the balance be repaid all at once, and
—Limit the monthly payment to 5 percent of the borrower's income.
Bourke estimates even a partial shift toward loans with these changes could save low- and moderate-income consumers
So far, though, nobody in
AN ANSWER, NOT A SOLUTION
On
On the same day the
Banks experimented with short-term loans a few years ago, offering what they were careful to call "deposit advance products" to customers who needed fast cash. Despite the different name, deposit advances worked a lot like payday loans. People could borrow a few hundred dollars for a fee and repay the loan with their next paycheck.
The
The
"Once they get in, they can't get out," says
Regulators started warning banks against deposit advances. The six major banks that offered them —
Even though banks can now resume small-dollar loans, it's not clear that they will. The
Also, critics did such a good job of equating deposit advances with payday loans that banks are hesitant to get back into the market, says
"It's not worth the reputation risk to them," Pommerehn says.
Ideally, people would save money for emergencies , rather than turn to high-cost short-term loans. But since so many fall short — 44 percent of American adults say they can't raise
This column was provided to The Associated Press by the personal finance website
RELATED LINK:
https://nerd.me/emergency-fund
Global Atlantic to Reinsure $9 Billion of Fixed Annuities and Other Spread Business as Part of The Hartford’s Sale of Talcott Resolution
Collision Auto Insurance Provides Excellent Financial Protection for your Vehicle
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News