US Bank is offering a small dollar loan product to customers facing 'unexpected expenses, like a car repair or a medical bill' as reported by the NY Times. This product is more designed to replace rather than compete with payday loans since the cost is much lower. However, the fees charged still translate to a very high interest rate of about 70%.
Payday lending preys on people who can least afford it. Unfortunately payday loan customers have few if any options. While they have jobs they generally have few assets and poor credit. This makes them poor risks for traditional lenders.
US Bank works to overcome some of the risks and high costs by 1) requiring that customers have a checking account open at least six months with recurring direct deposits and 2) automate as much of the process from application through collection. They also report the customer's payment history to the credit bureaus which will help them establish a better credit profile over time. Unfortunately the fact that the deposit account has to have been open for a minimum of six months limits the availability to existing customers. Many payday loans are taken out of immediate need such as a car repair needed to keep a job.
The bank also is more customer friendly in that repayment is spread over 3 months with the payment limited to 5% of the borrower's monthly income. Plus they will not withdraw funds if it would result in an overdraft and related fees. As additional protection to borrowers they must wait 30 days after paying one loan off before applying for a new one. This helps them avoid falling into the trap of incurring more high cost fees by rolling over loans for many months.
While high cost these loans are still a step in the right direction for desperate borrowers. Adding budgeting help to struggling customers would make the product more valuable still. We applaud US Bank's efforts here and hope that many prospective borrowers learn about the program, set up their deposit account now, and only take out a loan if desperate.
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