Why Don't Banks Offer Padayesque Loans, Just With Lower Interest?

Credit Slips digests a recent article in the Journal of Economic Perspectives on Payday Loans. The article’s answer to why banks don’t offer low-cost, short-term, unsecured loans is that banks find fees, like from bounced checks, more profitable. Bob Lawless disagrees, offering this alternative explanation:

…it is more advantageous to the individuals who make decisions in banks to stick to traditional fee-based revenue streams that are booming rather than staking their career on an untested product.

A few scattered credit unions have given it a whirl, but major banks should step up. C’mon boys, new revenue stream. — BEN POPKEN

Stegman on Payday Lending [Credit Slips]
(Photo: northernplateguy)

UPDATE: Ralph writes, “US Bank does, and has been for I think a little over 6 months. I happened to log on to internet banking and saw the option to request an advance pop up just above my account info. There is a $500 limit and it pays off once a direct deposit hits your account. It looks like the rate is 10% of whatever you request.”

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  1. mfergel says:

    Why. Because right now they are more concerned with making sure Illegals have the ability to get credit cards with no social security number, be able to transfer their earnings to Mexico, etc.

  2. thrillhouse says:

    you answered your own question.

    “unsecured”

    some banks already do a small amount of unsecured loans, signature loans, or whathaveyou. Why do more? Why should they bother with padayesque loans? Why lower themselves to even be possibly marginally associated with such a bunch of scum bags with such a terrible reputation? Its just not worth their time and certainly not worth the bad PR.

    Besides, banks aren’t exactly hurtin’ by going with their current business plan.

  3. ikarl67 says:

    Most, if not all, banks offer automatic Overdraft Protection. I don’t understand why people who take out those “Payday Loans” don’t use overdraft protection instead.

  4. B says:

    There is also the problem that customers who typically use payday loans don’t trust banks.

  5. WindowSeat says:

    I think a lot of what falls under the description of microlending happens between friends and family or by asking for an advance on their check at work.

    Another thing to consider is people who aren’t in a big enough jam to use a Payday Loan, but still use a bank are likely to raise cash by selling off items like books,CDs and DVDs or pawning tools, electronics etc.

  6. kidnextdoor says:

    Just like Ralph noted, Wells Fargo also allows an advance provided you have direct deposit. The amount varies based upon several factors, mainly the amount and frequency of the direct deposit, and while I don’t know the interest rate of the advance, I do know it’s less than the rate advertised by payday advance places…

  7. Kero says:

    Wells Fargo has a Direct Deposit Advance of up to $500 at 10%, it’s automatically deducted from your next Direct Deposit (required to use the service). You can get into the revolving door situation just like with paycheck loans but WF starts reducing the amount available after 6 months until they wean you down to 0.

  8. SuperJdynamite says:

    “Most, if not all, banks offer automatic Overdraft Protection. I don’t understand why people who take out those “Payday Loans” don’t use overdraft protection instead.”

    Because that’s called “check kiting” or “paper hanging” and it can land you in prison.

  9. John Stracke says:

    @ikarl67:

    I don’t understand why people who take out those “Payday Loans” don’t use overdraft protection instead.

    Doesn’t overdraft protection work by taking the money out of your savings account, or putting it on your credit card? If so, I think the answer is that these are people who don’t have savings, and don’t have credit cards (or have used up their credit limit).

    They can’t afford to eat cake, either.

  10. swalve says:

    I used to repair equipment for one of those places. The manager/collector is more like a mother or father character. They call the deadbeats every day and keep on them to come in and pay, they are both friendly and nagging at the same time. A traditional bank isn’t going to do that, and doesn’t want to try doing that.

  11. mac-phisto says:

    ING Direct is also offering a new checking account called Electric Orange with an overdraft line of credit up to $1000. banks don’t normally offer “paydayesque loans” b/c the overdraft fees make up a substantial amount of their revenue base. $1000 at 12% earns the bank A LOT less than 12 overdraft fees at $35/ea. & $5/day negative acct. fee.

    never forget, banks are in the business to make money, not to serve customers. customers are just the source of their revenue stream.

    also, as previously stated by a few posts, payday loans are most commonly used by individuals who do not (or cannot) have a bank account. many also pay exorbitant fees for check cashing & often times their inability to have an account stems from prior history of account abuse.

    if an overdraft line of credit is what you’re looking for, find out if you qualify for membership at a credit union. many credit unions are more liberal in their stances on check payment, their fees are often lower & many offer overdrafting programs (usually with direct deposit). mutual savings banks are also a good bet for programs such as this.

  12. orielbean says:

    No, the overdraft protection is another fee-stream for a bank. If you write a “bad” check where you don’t have enough to cash it, the bank, rather than simply bounce it back to you, will pay the payable person whatever the amount was (up to some sort of limit depending on your account). They then charge you an overdraft fee of about 25.00 or so, and set your account balance negative to whatever they’d paid.

    I had BOA checking for years, and I used to forget writing checks sometimes. This feature was pretty darn good. This is not check kiting!

    Example. I have 200.00 in checking. I write a check for 250 for car insurance. Car insurance cashes the check on their side. BOA pays car insurance the 250.00. My account goes to -50, and then is charged another 25.00 for the overdraft, bringing my total available to -75.00 That is not check kiting at all. Not illegal, also not reported to your credit report, at least using the BOA checking version of overdraft protection.

    There are different flavors of protection. Some banks will give you a line of credit and draw against that instead of a negative checking and the fee. My credit union rocks – they suck the required cash outta savings and don’t charge an extra penny at all. Love those guys.

    Now, if you have NO protection – your check bounces, so the payable didn’t get paid. Then you get a fee from the payable person usually (as their own bank will dock them for a bad check) as well as another fee from your bank for overdrafting.

    So – a few scenarios out there for bad check writers. ALL strike me as better than the payday lending, as they are flat fees and not a percentage, and nobody but my bank has my bank account ABA info.

  13. kidnextdoor says:

    OMG…Kero posted the exact same comment at the exact same time I posted. I’m scared yet relieved to know someone else out there thinks the same way I do…

  14. John Stracke says:

    I think the real answer to the post’s question is that payday loans are risky, and so they aren’t profitable unless there’s a high interest rate to cover the risk. Otherwise, the payday places would be lowering their rates to compete with each other.

  15. aiken says:

    Citibank offers a “checking plus” automatic line of credit with their checking accounts, which runs at a reasonable rate of interest and is automatically tapped.

    However, I think it’s one of those semantic things — people who need payday loans have probably already exhausted their credit, so even if they had something like checking plus, it would probably be maxed out, and they’d still need the payday loan.

  16. @ikarl67:

    1) Definitely not all.

    2) From what I’ve seen banks and credit unions don’t offer overdraft protection with free checking accounts. You have to have a higher tier type of account where you get more features in exchange for paying a fee, keeping a minimum balance, etc. Someone who needs payday loans probably has free checking if they have a checking account because they can’t afford minimums or fees. So even if it didn’t need to be tied to a savings account or credit card (I think John is right that it does) they wouldn’t have the option of using it.

  17. rodeobob says:

    There are several good reasons why banks don’t offer “payday-esque” loans, but the most obvious are branding issues, and public perception of corporate governance.

    In other words, the payday loan practice is an extremely sketchy business, and banks like Wells Fargo and BofA rely on a positive public perception to drive their other lending practices. It’s one thing to borrow $200 from someone you think is sketchy, it’s something else entirely to borrow $200,000 for a mortgage.

    Similarly, if the payday lending organizations are comprised of smaller franchises, “mom & pop” organizations, and can be viewed as a sub-set of the industry, rather than ‘common practice’ in the industry, then the problem (and subequent solutions) are viewed as local issues. If a national bank with billions of dollars of annual revenue got into the short-term, high-interest lending game, then instead of local news stories and state legislatures doing investigations, the U.S. Congress would have grounds to interfere.

    Activists might lobby for better education, and boycott the chains of payday lenders, but the impact on those businesses would be minor. However, if Bank of America got into payday lending, and triggered a boycott of all their financial services (checking, saving, mortage, auto loans, student loans, 401k, investments) that’s a lot of business to put at risk because of one small, highly unpopular segment of lending.

  18. GreenHawkIA says:

    My bank, or rather my credit union, does. The University of Iowa Credit Union – http://www.uiccu.org – offers what are called “Payday Alternative Loans.” They go up to $500, but also are designed to help customers by offering a 12 month repayment period, and then you get billed for twice as much as you owe. That extra money goes into a savings account for you at the credit union so that hopefully you don’t have to use a payday loan again.
    See here:
    http://www.paydayloansabc.com/news/Oct_06/uicreditunion.ht

  19. lmedsker says:

    Why do people use payday loans instead of overdraft protection? It’s simple. A payday loan will cost you about $16 per $100 borrowed. My bank charges $39 for overdraft protection. So, as long as I’m borrowing less than $200 from a payday lender, it’s cheaper.@ikarl67: