Payday Lenders vs. Banks: Alternative and Traditional Loans Rivalry

Posted by Sara M. Varese

Traditional Banks Offering Alternative Payday Loans

The Consumer Overdraft Protection Fair Practices Act and the Credit Card Accountability, Responsibility and Disclosure Act may have encouraged banks to offer alternative loans, such as payday loans, causing competition among payday loans direct lenders and national banks observes Solomon Finance.

Traditional and untraditional lending

Because these enactments have muffled bank’s major sources of revenue, marked with Bank of America’s recent declaration that the overdraft fee legislation will be put into effect this coming summer, banks are reducing risks and pursuing other sources of income.  These changes include raising interest rates on credit cards, offering less free checking accounts, limiting student loans, requiring more spending to engage in credit card perks and competing against payday lenders by increasingly marketing payday loan type products under different names such as Direct Deposit Advance, branded by Wells Fargo.

As lending options continue to narrow in availability, national banks are not the only institutions competing for payday loan customers: credit unions such as Kinecta Federal Credit Union are also offering these types of services.

Short term cash loans are not the only thing that payday lenders and national banks have in common:  Both have been the largest contributing efforts to challenge federal financial regulations.  However, national banks may have an unfair advantage, argues Steven Schlein, spokesperson for the CFSA, as he mentions that national banks are exempt from state laws limiting interest rates. He adds, “banks caused the financial meltdown, and they’re spending millions and millions to spare themselves from tighter regulation while throwing the consumer lending industry under the bus,” he said. “They’re trying to divert attention to us.”

Although extra attention has been given to payday loan lenders during these financial reforms, it is unlikely that they will be significantly impacted in comparison to 2006, when Congress passed a bill that capped interest rates to 36% for active military members.  An interest rate cap at 36% on small loans ranging from a payday loan amount of $500, on a typical two week pay period term would yield insufficient profits to sustain business operations.

The industry is constantly changing: by subscribing to finance newsletters or reading industry payday loans blogs, one can stay informed and educated about traditional and untraditional lending options.

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