To combat predatory lenders, banks may offer a safer choice
Inside Subprime: February 20, 2018
By Andrew Tavin
A new report by The Pew Charitable Trusts suggests that banks and credit unions could help underbanked populations by offering smaller, affordable installment loans. This could help prevent vulnerable Americans from falling into debt traps set up by payday lenders, who prey on people with poor credit and nowhere else to turn.
Currently many borrowers with bad credit scores are forced to take out payday or title loans in order to access fast cash in emergency situations. These loans have short payment terms, exorbitant interest rates, and, in the case of title loans, can lead to the loss of your car. The Pew report suggests that banks could provide an alternative, especially for customers who may already have an account with their company.
What if payday loans weren’t the only option? What if banks would offer small, short-term loans at a lower cost than payday lenders? They could easily do this, the report points out, by both taking a customer’s history with the bank into account, and conducing their business primarily online rather than renting out a storefront as many payday lenders do.
Last October, the Consumer Financial Protection Bureau released new regulations that would allow banks to offer small loans. Now it’s up to banks to create products that could fit within those regulations. The Pew report offers some guidelines for how these loans can be beneficial towards consumers, including lower interest rates and having the banks report payments to the credit bureaus so that customers can build their credit ratings.
Although banks have previously tried to offer small, short term loans without requiring good credit, these were deemed too predatory. As the report recounts:
“Until regulators largely put a stop to the practice in late 2013, a small number of banks offered costly ‘deposit advances’ that were due back in a lump sum on the borrower’s next payday, at a fee most often of 10 percent per pay period — or roughly 260 percent annual percentage rate (APR). Regulators should not permit banks to reintroduce deposit advance loans; for consumers, it is also vital that any small-dollar loans from banks and credit unions not replicate the three key harms that characterized the deposit advance market: excessive pricing, unaffordable payments, and insufficient time to repay.”
Banks and credit unions are, at least seemingly, willing to enter the small bad credit loan space. While speaking to the New York Times, Virginia O’Neill, senior vice president of the American Banking Association’s center for regulatory compliance, said, “Many people want and rely on small-dollar credit, and banks are eager to expand their offerings of trusted and responsible services to these borrowers.”
Whether those options will materialize, and whether consumers will be properly protected, remains to be seen.
Want to learn more about the dangers of predatory lending? Check out these related pages and articles from OppLoans:
- Payday Loans: The Most Dangerous Debt Trap
- What’s the Subprime Marketplace in My State?
- The Dangers of Title Loans