Payday lenders gone, not demand: Finance companies, banks vying to fill void when people seek cash
March 5, 2006 - Charlotte, North Carolina
It may seem odd to wonder where people will turn now that payday lenders have left North Carolina.
There is not exactly a shortage of opportunities to borrow money at very high interest rates.
But every year until this year, tens of thousands of N.C. residents borrowed money from a payday lender, paying as much as 20 cents for each dollar they borrowed.
Where will they go now?
Consumer advocates believe the demand was created by the suppliers. The Center for Responsible Lending in Durham, an industry critic, estimates 99 in 100 payday loans are made to repeat customers.
"Once a person walks through the front door for the first time they're going to keep coming back" because the high fees lead borrowers to repay their loans by taking another loan, said Yolanda McGill, a CRL policy counsel.
If you face a one-time shortfall, McGill said, ask your employer for an advance on your next paycheck. If you regularly struggle to pay your debts, seek credit counseling. "If you can't make ends meet, taking on another debt will never improve your situation," she said.
Still, money suppliers are jockeying to fill the void. After all, payday lenders collected almost $100 million a year in fees in North Carolina, according to CRL.
Perhaps the most direct replacement is offered by an unlikely group: mainstream banks. These companies increasingly advertise their overdraft fees as a service to customers.
The fee is charged when a customer writes a check for more than the amount in their account. If the customer is allowed to overdraft the account, rather than bouncing the check, they are borrowing money now and paying the bank with their next deposit -- the same basic idea that underlies a payday loan.
Banks charged an average overdraft fee of $26.90 as of November, according to Bankrate.com. If the fee was an interest rate, it would rival the sums charged by payday lenders, and the practice would be illegal in North Carolina.
Wachovia Corp. and Bank of America Corp. both use a tiered fee system. Wachovia charges $25 for a first overdraft, $30 for the second, third and fourth, and $35 for each additional overdraft in a 12-month period. Bank of America charges $19, then $31, then $34.
"We're doing it as a service to our customers, but it's not anything that we encourage," said Scott Silvestri, a Wachovia spokesman. "Those fees for overdraft protection are meant as a penalty. They're not meant to work as a loan."
You can also run up charges on your credit card. One plus: If your next paycheck arrives before your due date, the loan is free. But the cost of missing a payment is similar to the bank charge for an overdraft.
Another cousin of payday loans are the personal loans offered by consumer finance companies. They are not secured by property, and are available in relatively small amounts to people with credit problems.
Household Finance Corp. offers loans in amounts from $2,500 to $15,000 in North Carolina with interest rates starting at 18 percent.
First American Cash Advance, one of the companies that agreed to stop making payday loans last week, plans to convert into a consumer finance company.
Advocates have pushed banks to offer lower-priced alternatives to all of these products, so far with little success.
One program they do like is the Salary Advance Loan program offered since 2001 by the State Employees' Credit Union. Members can borrow up to $500, repaid from the direct deposit of their next paycheck, at a 12 percent annual interest rate.
The credit union hoped the program would help people break the cycle of borrowing, but it hasn't worked out that way -- not even after SECU started deducting 5 percent of each loan and placing it in a savings account on behalf of the borrower.
Through December, 57,869 members have used the program, many of them repeatedly. Some now have more than $1,000 in their savings accounts -- the result of borrowing on at least 40 occasions-- and they continue to borrow more.
"It has not been as successful as we hoped" in breaking the borrowing cycle, said Phil Greer, senior vice president of loan administration. But he emphasized that the loans remain a cheap alternative to a payday loan.
The Charlotte Observer, Binyamin Appelbaum, Staff Writer
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