Managing Debt

Are Banks Getting Out of Short-Term Loans?

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Quick-fix credit products have been under scrutiny in recent years, and the Consumer Financial Protection Bureau has studied how payday loans lead consumers into cycles of overwhelming debt. Deposit advances are similar in that they allow a bank customer to take out a small, short-term loan to make ends meet until their next paycheck hits their account (that direct deposit pays for the advance).

Two banks have announced they’re discontinuing such products this year. On Jan. 17, Wells Fargo and Fifth-Third banks issued statements saying they would terminate deposit advances, though the releases didn’t state exactly why.

For customers that already use the products from Wells Fargo and Fifth-Third (called Direct Deposit Advance and Early Access, respectively), they’ll still be able to use the services for a while. Direct Deposit Advance will shut down mid-year, and Early Access will remain available through the end of 2014. Both banks are no longer enrolling new customers in the programs.

As for what consumers can do after the advances are no longer available, neither bank had a clear answer, but the company statements indicated alternatives were being researched and developed. Fifth-Third acknowledged that consumers have needs for such assistance and that non-bank options (like a storefront payday lender) can be very expensive for people in need of credit.

At Fifth-Third, consumers pay $1 for every $10 borrowed, and you can only advance Fifth half of your combined monthly direct deposits of $100 or more. Wells Fargo has a $1.50-per-$20 fee, with a $500 limit on advances. In contrast, payday loans can carry interest rates in the triple digits.

The absence of deposit advances may leave many consumers desperate for help with no alternative to an expensive payday loan. The CFPB started regulating payday loans in 2012 and has been accepting consumer complaints about these services since November. According to the Pew Charitable Trusts, only 14% of borrowers can afford to repay those loans when they come due, and those who can’t pay may find themselves spiraling further into debt.

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