Big Banks Declaring War on the Poor

 

The New York Times Buck's Blog is reporting that some big banks are starting to offer payday-like loans.  After reading the article, I was scrolling the comments and saw that Cindy from Baltimore wrote:

There is no support for this. Our society has declared war on the poor at every front and it diminishes all of us as people.

I really couldn't disagree more.  There is absolutely a place in our society for these types of financial instruments.  Short term cash crunches happen, and it's good that reputable banks are starting to offer this service in addition to the other payday loan establishments.

How does having big banks offer payday-like loans help us?

  1. It legitimizes the financial instrument.  Some people see payday loans as something only offered by predatory lenders.  I know that  big banks have a bad reputation right now, but they do have a little more credibility than the average loan shark.
  2. It de-stigmatizes the user.  I have a friend who needed a loan like this once.  He was embarrassed (and a little scared) to go to one of those neon-lighted establishments with bars on the windows.  Now, with big banks offering this service it would be much easier and feel much safer to go through the process.
  3. It creates competition.  By adding new, big players to the game, there is the potential that APR will fall for payday loans as a result of these institutions competing for business. 

As anything other than a short-term solution, these loans are definitely bad for your personal finance, but in a time of need, they can be a lifesaver.  So, although I tend to abhor the tactics of big banks in general, I truly think their entry into this market could be a positive.

What do you think?  Ever taken out one of these loans?  How did you feel?  Would having the option of turning to a big bank bring you more ease?

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  • csdx

    I'm not sure I like the idea of payday loans being more universally pushed.I see payday loans a lot like whole life insurance. Sure, there actually are situations where it makes sense, but they're pushed on people far more than they should be. It's enough that sleazy 'financial planners' are trying to push whole life insurance on the unsuspecting, do we really need bank tellers trying to sell us payday loans too? True I'm making an assumption that banks will be pushing them, but given the profit margins on it, there's certainly an incentive.
    Payday loans are generally a poor product for what they state to solve (again like people who are trying to push whole life insuracnce on you). Heck even cash advances from a low limit card beat them, since you can't get more than a few hundred out of such a loan anyhow. Plus there's no repayment over time option on payday loands and it's due as a lump sum payment. However, people unable to come up with $x00 in a week (timeframe of an emergency) are unlikely to come up with $x00+$xx in two. So often these 'short term' loans end up being recycled several times (average of half a year) until the person can come up with a payment in full, all the while paying additional fees each time. So their exiborbitant APRs are closer to reality than might be initially advertised.
    I'd rather banks look at offering something more like short term micro loans. Even at something like 50% interest it's still a better deal than a payday loan.

    • I couldn’t agree more on the whole life insurance. I agree that bank employees may be incentivized to ‘sell’ you into those type of loans which is sucky. That’s why I bank over the internet so as to avoid speaking to humans as much as possible. However, cash advances on a low limit card are only available to people with credit. Many in the payday crowd are not truly credit worthy, which is why they are the payday crowd. All I’m saying is if you are part of the payday crowd, then the competition among banks for your business can only be a good thing.

  • Dax

    i am a little on the fence with payday loans, I can see the argument  and you might be right that they are a useful service people who need to get through a tough period but I think that the number of people who are truely in that tough period in minimal. I think that there are more people who are on the brink of serious financial trouble and they take out these loans thinking they will pay them back quickly but they actually push them well beyond their means.
    They are a great prodct if and when used correctly but I think that there is a real shortage of people who use them correctly…..
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    • It’s hard to have nice things to say about payday lenders, but when you do talk to their clientele, they are truly appreciative of the service. And, they are a huge risk to loan too so it makes sense that the lender should receive a higher rate of return based on the default risk.

  • I agree that this is a good service provided by the banks…  When I first read the title of the post I thought Oh no…  the big banks are engaging into predatory lending pratices (again)…  But upon further inspection, I think that the banks can be a good alternative to the typical predatory payday loan sharks…  I'm not saying that all the non-bank payday load places are bad, but there is a stigma surrounding them… they just seem so shady and dishonest.  I just hope that the banks take the high ground approach and don't charge crazy high interest rates… Some of the typical payday loan places have been known to charge 30 percent or more… the banks need to keep the rates down and become part of the solution, not part of the problem.
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