A 100% interest rate?

Some banks have started to hand out short-term loans, ones they clearly describe as an 'expensive form of credit.' No kidding.

By Trefis Nov 20, 2012 6:08PM
logoHow many times have you found yourself in a tight spot financially, with a longer list of bills waiting for your attention than your bank account is ready to accommodate?

Facing a situation like this, someone offering you ready cash is bound to look like a savior. More so if your savior is one of the country's biggest banks. If you have heard of Wells Fargo's (WFC) Direct Deposit Advance or U.S. Bancorp's (USB) Checking Account Advance offerings and are actually considering one of these short-term loans, you should take a closer look at the underlying terms first. Those terms certainly seem to be onerous enough for the Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau to scrutinize. After all, do you need that loan so badly that you are ready to pay interest rates in excess of 100%?

In recent months, some banks have started to hand out short-term loans -- usually for the duration of one month -- which are disturbingly similar to the notorious payday loans you could get from the shop across the street. The loans carry hefty lending rates, and have a "first-right" over any deposit you make in your account after taking the loan.


For example, Wells Fargo's Direct Deposit Advance plan advances up to $500 to customers needing urgent cash for a month's duration. And the charges are $1.50 for each $20 advanced -- which works out to an annual percentage rate (APR) of 90%. U.S. Bancorp's Checking Account Advance plan turns out to be even more expensive, with a loan of up to $500 for as long as 35 days drawing charges of $2 per $20 advance -- an APR of about 105%.


In comparison, credit cards -- seen as the most expensive bank loans -- attract rates of about 15% on average with the peak rate for customers with a bad credit history at around 30%.


Wells Fargo Net Interest Yield on Credit CardsThe banks are quick to point out the difference between their loan products and traditional payday loans. Their loans are still not so expensive as traditional payday loans, which have an average APR of 365%. Nor do they allow customers to keep rolling them indefinitely -- helping them keep away from getting into a debt trap.


And to be fair, the banks clearly point out that these loans are an "expensive form of credit intended to meet short term and emergency borrowing needs." What remains to be seen is whether the regulatory bodies also agree with the banks' view that they can charge the prevalent exorbitant rates for these loans.


See our complete analysis for U.S. Bancorp and Wells Fargo.


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