Forget Cash Advances: Banks Are the Real Predators
When you think of the practice of loaning small amounts of cash at a high interest rate for quick repayment, you probably think of cash advances. However, an increasing number of banks are offering these loans except they like to call them ‘direct deposit loans’. Unlike payday lenders however, banks are given protection that enables them to avoid punishment for charging higher interest rates than is allowed by state law. For example, a bank that introduces its direct deposit loan offer to Maryland is not bound by the state’s 33% interest cap on small cash loans. Hardly seems fair, doesn’t it?
Justification
Naturally, banks are keen to keep distance from the practice of cash advances. Wells Fargo charges $7.50 interest on a $100 short-term loan. The fact that this 261% interest rate would be illegal in certain states is irrelevant because such laws don’t apply to the banking sector. Wells Fargo tries to justify its actions by claiming they protect the customer. They only allow you to max out your loans for 6 months before cutting you off.
After enduring a ‘cooling off period’ of one month, you are allowed to apply for more direct deposit loans. Allowing a person to overspend in this manner for 6 consecutive months is poor practice on behalf of the banks. This is especially the case when payday lenders are accused of taking advantage of a customer’s failure to pay by charging high rollover fees.
Even the borrowing limit imposed by banks fails to give customers better financial safety than if they used a cash advance. Wells Fargo doesn’t allow you to borrow more than $500 or half the amount directly deposited into your bank per month, whichever is the smaller amount. Yet this is remarkably similar to the limits imposed on payday lenders. The bank automatically withdraws the repayment from your account on the due date and those who don’t have the cash are penalized. Again, this is all very familiar.
Pushing the Boundaries of Good Taste
Banks are trying to push the envelope and find as many ways of getting away with predatory lending as they can. For as long as anyone could remember, banks made a fortune from overdraft fees ($37 billion in 2009). New legislation was introduced and reduced this form of income for banks. Oddly enough, low income individuals were the main victims of these overdraft fees and all signs point towards the fact that banks are trying to push these same people towards direct deposit loans. Yet the Federal Government is focusing on cash advances and ignoring the behavior of the banks. This means that banks can continue offering direct deposit advances with interest rates higher than the state limit.
Instant cash loan companies are painted as the great villain of 21st century borrowing but in reality, they are only a small fish in the giant financial ocean. Banks have always been the Great White Sharks and will continue to rule the financial world as they have the resources and clout to prevent any entity from threatening their hegemony.
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