An Alternative to Payday Loans, but It’s Still High Cost

Reaction to the new loans has been mixed. Nick Bourke, director of consumer finance at the Pew Charitable Trusts, which supports making affordable small loans available to consumers with appropriate safeguards, said the new loan appeared promising. When the loan program was announced, he tweeted that it was a “game changer.” Pew opposes payday loans, but has called for mainstream banks to offer less risky small loans to help consumers when they hit financial potholes. The U.S. Bank loans include some features that Pew recommends, Mr. Bourke said, such as limiting loan payments to 5 percent of the borrower’s monthly income and avoiding overdraft fees.

While the loans are relatively expensive, they are far less costly than alternatives like payday loans or auto title loans.

“It’s a great first step,” Mr. Bourke said.

According to Pew’s research, 12 million people a year take payday loans. If borrowers can’t make the payment, they often pay more fees to renew the loan. Payday borrowers, Pew found, spend an average of $520 in fees to repeatedly borrow $375.

U.S. Bank’s new loans cost $12 for each $100 borrowed, when payments are automatically debited from a customer’s account. The fee is $15 per $100 if a customer opts out of automatic payments.

“This is a high-cost loan,” Ms. Heitman acknowledged, adding that the bank was being “transparent” about the fees. The bank has received strong positive feedback from customers, she said, who say they find the loan terms easy to understand.

The Center for Responsible Lending, an advocacy group, was skeptical of the value of U.S. Bank’s offering, saying the loans are still too expensive for most low-income people, many of whom are already burdened by debt and have little wiggle room to take on more.

“It’s a step in the wrong direction,” said Rebecca Borné, the center’s senior policy counsel.

And while the bank won’t let the customer’s checking account be overdrawn by a loan payment, she said, the payment itself could cause the account’s balance to shrink so low that subsequent bills cause overdrafts.

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