Big Banks Finance Payday Lenders: You Knew that but did you Know some also Make payday loans?

This video is totally worth you 2 minutes. It describes big banks in rather unflattering terms (as parasites, for example) but the main thing I got out of it is that big banks finance payday lenders. Yes, it is true that the same banks that received TARP bailout money are funding payday lenders.  The payday lenders include Advance America, Cash America and ACE Cash Express, which allow customers to borrow against future paychecks, and which charge an average interest rate of 455 percent on top of fees of $15-18 per $100 loaned. These lenders depend on the big banks' financing for their business.  Moreover, Wells Fargo, Fifth Third Bank, and U.S. Bank, all make their own payday loans too.Talk about double dipping!

Just a few more fun facts.  According to Showdown in America, a non-profit seeking to hold big banks accountable:  

1. An estimated 120 million payday loans are issued annually in the US worth a total value of $42 Billion.
2. The average effective interest rate on a payday loan is 455% (APR). For a loan of $300, a typical borrower pays on average $775, with $475 going to pay interest and fees over an average borrowing cycle.
3. There are some 17 major payday lending companies (both public and privately-held) that operate approximately half of the nation’s total of 22,000 payday lending outlets.
4. Major banks provide over $1.5 Billion in credit available to fund major payday lending companies.
5. The major banks funding payday lending include Wells Fargo, Bank of America, US Bank, JP Morgan Bank, and National City (PNC Financial Services Group).
6. All together, the major banks directly finance the loans and operations of (at minimum) 38% of the entire payday lending industry, based on store locations.
7. The major banks indirectly fund approximately 450,000 payday loans per year totaling $16.4 Billion in short-term payday loans.
8. Wells Fargo is a major financier of payday lending and is involved with financing companies that operate one third (32%) of the entire payday lending industry, based on store locations.
9. All of these above mentioned banks received TARP bailout funds in 2008-09 and have benefited from accessing capital at exceptionally low interest rates from the Federal Reserve.
10. Major banks access credit from the Federal Reserve at 0.5% or less, these banks extend an estimated $1.5 Billion annually to eight major payday lending companies, who in turn use this credit to issue millions of payday loans to consumers every year at average rates of 400% APR.

Comments

[Tim Hawkins]

I don't see the tie-in between TARP money and payday lending...

Sure, big banks loan money to payday lenders, and lots of other types of businesses. Banks are in the money lending business. That's the point of their whole industry.

Is the author actually expecting that big banks determine the moral good of each customer before lending to them? I don't blame the fast food industry for making people fat. I expect that people will do what people do. If they choose poorly in their food selection or in their payday loans... It's *their* personal responsibility to make good choices. The business is fulfilling its role; to provide a service. If no one buys that service, then it won't be there.

Big banks also fund alcohol related businesses too; should they be on the hook for the ~58,000 alcohol related deaths each year on the highways as well?

[Ebenezer Scrooge]

I agree with Tim Hawkins. Yes, payday lending is evil. And the banks are funding their evil. But why stop at banks? Maybe we should also go after the telephone companies and internet service providers that facilitate their evil acts. Oh, yes, I forgot landlords! (Anti-abortion activists love going after landlords.)

Banks have enough immorality on their own books. We don't need to make them guiltier by association--they're bad enough. Liberal societies are loosely-coupled societies, and I can't see a reason otherwise here.

[Bob Dobolina]

455%
that's ok? That's usury, I believe even Jesus was against that.

As far as fast food and obesity, suppose you have $5 to spend and a couple kids, you can't afford fresh food and probably don't have time to cook it since you'd have 2 or 3 jobs to pay off the 455% interest on the loan to pay your rent so you don't get evicted.

When you have the comfort of a well paying job and you don't have to worry about feeding your kids or paying the rent you have time to educate yourself about options and have the luxury of time to do things better. When you're scraping a living off minimum wage jobs with no future, you survive!

[russ]

The reason the effective interest rate is so high is because the borrower's keep rolling the loans over, not because the Payday lender is charging 455% interest on average.

Here is $100 bucks for a $20 fee. Pay me back by next week or the fee doubles. They don't pay me back, so then the fee goes to $40 bucks the following week. then $60. Then $80. that is how the average interest rate gets so high.

These are meant to be SHORT TERM loans that get paid back almost immediately. However, the reality is that they hardly ever get paid back immediately because the target market consists of people who are always in perpetual financial trouble. Very high risk lending.

If there is so much fat and over charging going on, I am sure another private company would have stepped in to under cut the competitors. The reality is that no one has because unless you are charging these astromical fee and rates, you cannot make any money and would go broke yourself.

Payday lenders are fulfilling a need for people who are not going to be served by traditional banking.

Personal finance and other life skill classes are needed if you really want to stop communities from patronizing these businesses. However, there is always going to be a market for essentially loan sharking as there are always going to be high risk borrowers who need a short term loan. Better to make them legitimate busineses instead of people going to pimps and wise guy types under the table.

[Jim O'Connor]

Mr. Hawkins,
Did the taxpayers bail-out Wendy and the Burger King?I believe the answer is no. However the taxpaying public did bail-out many major lenders. Therefore, it would seem that these lenders/welfare reipients should be held to some standards of responsibility to the public.

[Ebenezer Scrooge]

Russ is correct: the choice is between legal and illegal loansharks. But he views the choice as an easy one. I agree; the choice is easy. But not the way Russ thinks it is.

- Illegal loansharks don't take out ads on teevee, showing how much fun! a loan can be.
- Nor do illegal loansharks have websites, yellow pages ads, or billboards.
- Illegal loansharks don't have easy access to bank funding.
- Illegal loansharks don't claim to be "regulated businesses."
- Nobody thinks that illegal loansharks are "friendly" or "customer-centered."

If you are desperate enough for a loan, you will find somebody to give it to you, even if your collateral is the same as your kneecaps. But payday lenders, like any legal business, are good at inducing demand. Think what would happen to drug consumption if it were ginned up by the good folk at Altria.

[russ]

Scrooge, I am not saying Payday lending isn't a sleazy business. Last I checked, Payday lenders won't break your kneecaps if you don't pay. They just leave harrassing phone messages.

There is nothing wrong with business advertising to get customers. Almost all advertising is misleading in some way, no matter the product.

Again, it all goes back to personal responsibility and educating consumers so they don't find themselves needing to patronize these businesses.

[Knute Rife]

I think Ms. Martin's point is that the TARP recipients didn't use that money to create their own consumer and small business loans as intended. Instead, the money was "invested" in an industry only made possible by brain-dead legislatures repealing the usury laws and only staying in business by spreading lies as complete as any late-night infomercial (Did you see the recent industry report claiming a repayment rate in the high 90s? First, if the repayment rate is that good, why the big fees and interest rates? Second, you KNOW they're including rollovers, which are the main generators of those high fees and interest rates.). In other words, while we originally thought the banks just sat on the TARP money to improve their reserve accounts, which was bad enough, we now see they actually used it to generate more toxic debt.

As for educating consumers, if something breaks (car, furnace, kid's arm) and you don't have the cash to pay, you go scrounging, and beggars can't be choosers. The only way to "educate" around that is give people a fighting chance to earn a living wage and benefits, but such "socialism" has been banned.