Published October 1, 2010 | October 2010 issue
Some financial products offered as payday loan alternatives are as expensive as payday loans or more so, according to a report from the National Consumer Law Center (NCLC).
A payday loan is a short-term, high-cost loan that is secured by the borrower's next paycheck. Payday loans typically have terms of about 14 days, carry high APRs (annual percentage rates) of up to 782 percent, and require balloon payments. These features can lead to repeat borrowing in which the consumer's debt escalates. Most payday lending takes place at nontraditional financial establishments, such as storefront check-cashing outlets. In recent years, many mainstream banks and credit unions have begun offering short-term loans, cash advances, and other financial products that are often touted as safer, less expensive alternatives to payday loans. However, as the NCLC reveals in Stopping the Payday Loan Trap: Alternatives That Work, Ones That Don't, some of the "safe" products are essentially payday loans called by another name.
The report's authors examined 119 payday loan alternatives offered by a mixture of 114 national, regional, and community banks and credit unions. They evaluated the products according to four criteria set by the NCLC: carrying an APR (including fees) of no higher than 36 percent; having terms of at least 90 days, or one month per $100 borrowed; requiring multiple installment payments instead of one balloon payment; and not requiring that borrowers provide the lender with a post-dated check or electronic access to their checking accounts.
The researchers rated 45 of the 119 products "Genuine Payday Loan Alternatives and Ones That Come Close." An additional 16 products received the rating "Better Than a Payday Loan But Still Problematic." The remaining 58 products—almost half of the total—received the rating "A Payday Loan by Any Other Name." All of the products in the last category featured loan terms of 45 days or less and triple-digit APRs. According to the NCLC, the most expensive of these products were bank and prepaid card direct-deposit account advances offered by a few of the largest national banks.