The banks say their deposit- based loans are safer than so-called predatory loans from payday lenders because they require borrowers to have a history as a bank customer, which allows the banks to better assess their customers’ ability to repay.
But critics note that both types of loans carry triple-digit annualized interest rates and typically require repayment when the borrower receives his or her next paycheck.
These terms have trapped some local residents in a cycle of repeat borrowing.
“My husband and I have gotten caught in that vicious cycle more than once,’’ said Tracy McCarroll, a management assistant at the Dayton-based engineering and technical services firm MacAulay-Brown Inc. “On more than one occasion, we have had a family emergency, vehicle repairs, extended leave due to illness, which caused us to fall behind on our monthly bills and used short-term loans to try and help us catch back up.
“The problem is that when you are already living paycheck to paycheck, it’s difficult, if not impossible to find the extra income to pay the loan back, forcing you to re-borrow over and over again,” McCarroll added.
Banks that offer short-term, deposit-based loans — including Cincinnati-based Fifth Third Bank and U.S. Bank — readily acknowledge the high interest rates and potential drawbacks. Bank officials say while the loans aren’t for everyone, they beat the alternatives, such as tax refund anticipation loans or loans from pawn shops.
Fifth Third, which began offering short-term loans in 2008, clearly defines the terms of the loans so their customers are well aware of what they’re getting into, said Lea Ann Stevenson, a Dayton-area spokeswoman.
Fifth Third charges a dollar for every $10 borrowed or the equivalent of a 120 percent annualized interest rate on a one-month loan, Stevenson said.
That’s similar to the terms of most other banks in the area that offer short-term loans.
“We try to make it very clear that this is an expensive form of credit and should only be used in situations where you need those funds quickly and you do not have access to less expensive terms and forms of credit,’’ Stevenson said. “If this becomes an habitual thing, we would want to sit down with customers and talk to them about what would be other forms of less expensive credit.”
She said Fifth Third operates in a much different manner than true payday lenders, which make loans to anyone with a job and a bank account.
One big difference, Stevenson said, is that unlike most payday lenders, Fifth Third sets limits on the amount their customers can borrow against their next deposit. Fifth Third customers can borrow up to $1,000 or no more than half of the total of their next deposit, based on a three-month average of those deposits, she said.
“We certainly limit the number of times that people can do this, and we limit the amount that they can take. And that is tied to the fact that they have a direct deposit coming in on a regular basis,” she said.
But Fifth Third, like many of its peers, also automatically deducts payments from the borrower’s next deposit, even though the loan agreement allows up to 35 days for repayment.
That runs counter to Federal Deposit Insurance Corporation guidelines that encourage banks to offer “affordable, small-dollar credit products on terms longer than just a few pay cycles to give consumers time to repay.”
The automatic deductions can also boost the annualized interest rate above 300 percent, if the loan is reclaimed in a typical two-week pay period, said Kathleen Day, a spokeswoman for the Center for Responsible Lending, a Washington, D.C.-based consumer advocacy group.
“Those are the same kinds of interest rates that led to the government restrictions on payday lenders in the first place,” Day said. “The banks are just exploiting a loophole, and regulators are letting them do it.
“When they (regulators) capped interest rates on military personnel, they said they were trying to protect service members and their families from predatory financial problems,” Day added. “If it’s not good for the military, why is it good for everybody else?”
Day was referring to legislation passed by Congress in 2006, capping interest rates on payday loans made to U.S. military members and their families at 36 percent. Two years later, the Ohio legislature capped interest rates on all payday loans at 28 percent — restrictions that drove lenders to less restrictive markets.
Short-term bank loans are now under review by the Senate Banking Committee.
Not all banks offer the loans, but the sour economy has created a huge potential market.
A survey published earlier this year by the National Bureau of Economic Research found that nearly half of all U.S. households are “financially fragile’’ and would be unable to raise $2,000 in 30 days to meet a financial emergency.
Even with the high interest rates, a short-term bank loan is often a much more attractive option than bouncing a check and absorbing bounced-check fees from retailers and banks, said James Thurston, a spokesman for the Ohio Bankers League.
“Common sense tells you that as the economy deteriorates, there is going to be more demand for these kinds of products,” he said.
“It’s obviously better to seek this kind of financing from a bank than a less reputable source.”
Contact this reporter at (937) 225-2437 or rtucker@DaytonDaily News.com.
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