Reports from various consumer groups reveal that some of the biggest banks in the US, including Wells Fargo, have started to offer short-term, high interest rate loans that are much like bad credit loans, or payday loans. Although not labeled as such, and is instead known under the term “direct deposit advance,” consumer groups believe that this kind of loan offered by Wells Fargo works like the dreaded payday loans. Payday loans are popular for their high interest rates and are perceived to lead credit consumers into a financial trap.
In a letter addressed to the Office of the Comptroller of the Currency, which investigates Wells Fargo’s direct deposit advance, the Center for Responsible Lending and National Consumer Law Center says, “Wells Fargo makes payday loans. The bank calls its product a ‘direct deposit advance service,’ but it is structured just like a loan from a payday loan storefront, carrying a high-cost (averaging 270% in annualized interest) combined with a short-term balloon repayment (averaging just 10 days).”
Wells Fargo’s direct deposit advance is reported to offer consumers with checking accounts of as much as $500 in a high-interest loan. The bank, however, claimed that it only charges $2 for every $20 borrowed, unlike payday loans which charge more expensive rates. Tom Barlow of Daily Finance emphasizes that this loan needs to be paid off within a month, a term or condition that is similar to payday loan.
The industry of payday loans has been scrutinized and bombarded with feedback from various consumer groups because of the high interest rates that it charges to borrowers. And with major US banks reported not just to offer loans that resemble payday loans, but also to finance the industry, consumer groups are also calling for authorities to start investigating these institutions and to take action in order to protect the consumers.
Kathleen Day of the Center for Responsible Lending says, “Unaffordable short-term loans cause harm rather than meet the needs. These loans are not ‘alternatives’ to payday loans. They are payday loans. They are structured exactly the same, and like other payday loans, the data show these loans trap borrowers in a long-term cycle of high-cost, unaffordable debt.”
Wells Fargo Called to Drop Direct Deposit Advance a.ka. Bad Credit Loans
Despite calls to stop offering these loans, however, Wells Fargo doesn’t seem like it has plans of doing so. As a statement from the bank’s consumerist goes, “Wells Fargo has been offering [direct deposit advance] since 1994…It is a line of credit only available to customers with established Wells Fargo consumer checking relationships and recurring qualified direct deposits…We believe that the Direct Deposit Service is a less expensive and more flexible alternative to a payday loan for our customers.”
Meanwhile, a spokesman from Community Financial Services Association defends the payday loan industry, saying that payday loans are a valuable service to a lot of consumers in America who are in immediate need of cash.