What is the Truth About Banks and Payday Loans?

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magnifying lensMany consumers will be very surprised to discover that some major, well-known banks have quietly jumped on board the popularity of the cash advance loan bandwagon. Although banks and payday lenders are often depicted as being diametrically opposed to one another, the truth is that a number of online payday lenders are allied and partnered with leading banking institutions.

Support from banks helps put payday loans into mainstream

The support from banks helps to give online payday lenders’ profile a boost, taking them from the fringes of financial products, into the respected mainstream of lending options. Banks traditionally have very conservative partners within the finance world, so the connection between banks and payday lenders can be seen as something of a stamp of approval for the thriving online cash advance loan world.

Highly popular

It’s easy to see why banks would want to be involved, when the payday loan industry is positively booming.  And the expansion is set to continue – investment bank Stephens Inc. estimate that by the year 2016, internet payday loans will comprise 60% of all available cash advance loans. This means that in the next 3 years, the industry will swell by around 30%. In 2011, the volume of online payday loans is $13 billion – this was an increase of more than 120% from the total volume in 2006 of $5.8 billion.

What is the role of banks within payday loans?

Banking giants such as JPMorgan Chase, Bank of America and Wells Fargo do not pay out loans or provide loan funds to the payday lenders or their borrowers. Instead, their role is to help facilitate the lenders to withdraw loan repayments automatically from the borrowers’ bank accounts. The assistance that some banks give to payday lenders to help process and send electronic funds is instrumental in helping payday lenders offer emergency loans to consumers, and help take the payments conveniently for the consumers’ benefit thereafter. This means that consumers do not have to struggle to remember payment dates, queue in line to repay loans or send checks in the mail.

Controversy with banks taking facilitating repayments in prohibited states

Around 15 states currently ban payday loans, although a number of less reputable lenders have circumvented regulations by opening offices offshore in Malta, Belize or the West Indies in order to escape various states usury and finance charge caps. Some consumer groups are unhappy with certain banks for continuing to work with these lenders, and helping to implement electronic payment services for them, despite their flouting state laws.

Authorization from customers

However, the banking industry has defended itself, stating that they are simply providing a service to the consumers that have accepted the quick money payday loans and authorized the repayments to lenders to be automatically retrieved from their accounts. It is not able to monitor customers’ accounts to see where the payments are going, be it to onshore or offshore locations.

Bank fees under scrutiny

Another aspect of banks’ involvement that is under scrutiny from consumer action groups and lawmakers is the amount of fees charged to payday loan customers who go overdrawn once payments are automatically mandated. Banks set their own fees – unlike regulated and reputable payday lenders, which must follow state rules and strict charge caps- and some banks have over-the-top penalties for bounced payments.

What borrowers can do to stop automatic payments and possible penalties from banks

Consumers are advised to contact their banks 3-5 working days before a payment is due to go out from the account in order to stop the payment and avoid fees and penalties that may be levied if the repayment will bounce.

Exercise consumer rights with banks

Asking to revoke automatic withdrawals is a consumer’s right which should be exercised accordingly. For example, this should be in situations where advanced warning of the cancellation has been raised with the payday lender in the first instance. The request should legally be honored by the bank, although the payday lender should also be contacted in order to make alternative arrangements for repayment.

Maximize the benefits of cash advances

Payday loans are easy to get, useful for many purposes and can even be a route to borrowing without a credit check. Keeping banks in order by expressing any desires to cancel automatic retrieval arrangements when warranted will help consumers to save money on charges and fees and escape defaults on their credit files.

Have you received any bank penalty fees for  bounced electronic payment? Do you think that banks charge too many fees and profit too much from consumers? We want to know what you think! Tell us in our comments section, below!


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