Payday lending traditionally happens in seedy storefronts, often in low-income neighborhoods and around military bases. Not any more! Eager to get in on the next big subprime lending bubble before it bursts, big banks are brushing up on their loan shark chops and opening payday lending divisions.
So what’s the problem, here? Well, payday loans from banks typically carry annual interest rates as high as 365%. That means if you took out a $10 loan, it would cost $46.50 to pay it back. It doesn’t feel so bad because payday loans are supposed to be short-terms loans, but the typical payday loan customer uses payday loans often enough that he or she is actually paying that kind of interest.
Banks are especially interested because they tend to hold the payday loan customer’s deposits, as well. Payday loan customers wind up paying more in overdraft fees, and are more likely to lose their bank accounts. In short, it’s bad news for consumers.
The Center for Responsible Lending is watching this trend, and has more information about big bank payday lending.
The same banks that used to make—or finance—the subprime loans that sent the world economy into a nosedive are now making and financing payday loans. Now they just use TARP funds and cheap loans from the Fed.
Payday loans are still subprime loans, but the risk is built into the enormous interest rates, which average 455%. The mafia offers better interest rates. Actually, the mafia is probably just operating payday loan storefronts now. Wells Fargo in particular is knee-deep in payday loans. It directly finances a third of payday loan branches in the U.S.
In order to make those 455% loans, banks like Wells Fargo and US Bank are able to borrow money from the Federal Reserve at .5% or less. (Wait, does that mean they can really average a 454.5% profit, not counting defaults? Holy shit.)
(Video from Showdown in America.)
Citibank, U.S. Bank, Bank of America, Wells Fargo, and Pacific Capital Bancorp have been called out by the Congressional Oversight Panel for using taxpayer money to turn around and rip off taxpayers.
Essentially, taxpayers end up paying twice: once to the government, once to the banks.