Big Banks Getting Out of The Payday Advance Business

Due to the start of rigid regulations being placed on payday loans, some big banks are getting out of the payday advance business. Those included in the list of banks to exit the payday advance industry are Fifth Third, Guaranty Bank, U.S. Bank and Wells Fargo. This could be just the start of a large amount of changes to come to big banks as much stricter rules are getting placed on a range of banking products.

The Risk of Payday Advance Loans for Banks

Payday advance loans are so called because of their direct tie to customers’ government benefits, paychecks or other types of income that is deposited into a bank account. These types of loans are often looked down upon for their extremely high interest rates and difficult payment terms. Due to this, bank regulators have gotten pressure to implement stricter regulations in order to deal with the risk that payday advance loans pose to consumers.

New Regulations of Payday Advance Loans

These new regulations that are being placed on payday advance loans cause problems for big banks, making these types of loans less profitable and not worth the trouble for banks. Although new regulations do not outright ban banks from selling payday advance loans, they did place rules on them that are strict enough to cause big banks to begin to pull out of the business.

Close-End vs. Open-End

One of the most significant new rules to impact big banks is the banning of open-ended credit lines, which is the structure that many banks follow. For instance, these regulations require that banks put a cooling period in place in order to stop customers from taking out multiple payday advance loans during one payday cycle. This rule counters many banks allowance of customers to take out advances whenever they are needed.

Wells Fargo

Wells Fargo is the biggest bank to discontinue its policy of lending out payday advance loans. The last day to obtain this type of loan from them will be January 31st. However, for those customers who already have an existing loan, immediate changes will not be put into place. In fact, existing payday advance loan customers will be able to have access to the service for half a year, at which time Wells Fargo will implement a plan to transition their customers.

Fifth Third Bank

Fifth Third Bank has plans to take away their payday advance loan service by the end of 2014. However, they are in the works to create alternative loan products for those customers who benefit from payday advance loans.  There is clearly still a need for short term and small credit solutions, and so alternative loan products that are similar in design to payday advance loans will likely become available to meet demand.

Customers Turning to Payday Lenders

As new regulations push big banks out of the payday advance lending business, customers find themselves with limited options. Many are turning to online payday lenders or brick and mortar payday lenders to have their lending needs met. Due to this, many financial experts think that these new regulations do not actually help customers obtain better terms for payday advance loans.

The Popularity of Payday Advance Loans

A study found that over half of those who use payday advance loans paid off their payday loan only to obtain another within twelve days. In fact, the average payday loan user took out ten payday advance loans each year, and was subject to an average of $460 in fees. Those who use payday advance loans can pay as high as $1o for each $100 that is borrowed.

loans - 23 Jan, 2014 - No Comments