A recent survey from the financial data company RateWatch shows that payday loans are continuing to grow in popularity at small banks and credit unions.

A Small Institution Offering

37% of small financial institutions — including banks and credit unions with less than $100 million in assets — already offer some kind of small-dollar loan program.

20% of small financial institutions plan to offer quick-cash loans within the next year.

Most small-dollar loans are akin to payday loans in that they have a short payback period, are dispersed in amounts ranging from $50 to $1,000, and have relatively high interest rates or fees associated with them in exchange for easy money without a credit check.  Many credit unions also offer small-dollar loans at lower rates to members with good credit ratings, and the loans are structured more like traditional ones. According to the RateWatch survey, 68% of the 259 financial institutions that were surveyed limit the number of payday loans a consumer can take out in a certain time period.

High Fees

 5,000 out of the 210,000 members of the Wright Patt Credit Union in Dayton, Ohio use a payday loan service called Stretch Pay. Borrowers can access a $250 line of credit over the course of one year, with an annual interest rate of 18% and a $35 fee. Factoring in the annual fee, that annual interest rate creeps into the triple digits. Members must repay the loan in full before re-tapping the line of credit.

“You have to charge more [for payday loans] because you have no idea about underwriting,” said Doug Fecher, president of Wright Patt. He added that the fees and interest rate cover loan losses and operating costs. Regions Bank has defended its payday lending services, according to American Banker, saying that its loans are cheaper than those a consumer would find at storefront lenders, which charge a $16 fee for a $100 loan .

Bigger Banks Getting Into the Action

A few traditional big and medium-sized banks also currently offer these kinds of instant cash loans. For example:

  • Regions Bank now offers Ready Advance loans in amounts from $50 to $500. The cost is $1 for every $10 borrowed, and repayment is deducted automatically from a member’s next occurring direct deposit.
  • Wells Fargo offers Deposit Advance loans in select states, charging $7.50 for every $100 borrowed.
  • Fifth Third and US Bank also offer small-dollar loans.

Expect Closer Scrutiny

Consumer groups have criticized the payday loan industry’s rollover policies, which allow consumers to extend a loan over many terms and can create an endless cycle of debt. As more banks offer these lending programs, they are also drawing the attention of a the Federal Deposit Insurance Corporation, which is expressing concern over the use of third-party software used to manage the loans. The FDIC said it would launch an investigation into bank-originated small-dollar loans.

Storefront payday lending has become an increasingly hot topic for cities and states. In California’s Bay Area, a number of cities and counties have already limited or have proposed limits on storefront payday lenders. Some states have banned payday lending altogether and others have put caps on interest rates for the loans.

More About Payday Loans

What is the landscape of payday loans in America today? There are 25,000 payday loan outlets in the USA with an annual volume of more than $30 billion. There is more payday lending stores in California than Starbucks and McDonalds locations combined, although eight states prohibit them. The infographic below provides some additional facts.

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