Do Banks offer payday loan?
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If you live in the US, you would know how a payday loan works and how difficult it is to get security from the private lending stores. With an interest rate as high as 260-400%, the borrowers are ripping their shirts in frustration and helplessness. On the other hand, many people have started to shift their attention from private lenders to banks, believing that banks would have a better repayment system with a reasonable interest rate. But let us learn more about what kind of payday loans does banks offer us.
What is a payday loan?
Before we establish whether banks give us payday loans or not, let us in detail review how a payday loan works. Payday loans are short term loans, mostly given in cash to the borrower for less than a month. The interest rate varies from $15-35 per $100 borrowed. It also includes a finance charge. If for example, you have applied for a payday loan for a week, you pay the total amount borrowed with the interest and finance charge added. If you fail to repay the amount on the payday, you will have to pay at least the interest rate. If nothing is paid, the interest rate doubles and is to be paid with the total loan amount on the next payday.
Some states restrict the rate of APR, whereas some states limit the duration of the loan while allowing the higher interest rate. Many people who opt for bank loans hope that the banks would offer small loans on lower interest rates.
What kind of payday loan do banks offer?
In recent years, many banks have realized to benefit from the opportunity of something called "short-term" loans. They have started to offer the same, yet a different alternative for the payday loan known as "deposit advance". Such loans are provided to the existing account holders of the bank who use a direct deposit system against their paychecks. Similar to that of a payday loan, the borrower must repay the entire amount with their next payment. Being an existing customer of the bank, the bank automatically withdraws this amount, which means that the bank is fully assured that the amount would be repaid.
What is the interest rate/APR?
Apparently risk free, such loans charge $10 for every $100, which seems better than the traditional payday lender. Furthermore, as the users of deposit advance have to repay the complete amount on the pay day, borrowers find it important to borrow again in order to repay the previous one. Because in case of a bank based payday loan, you can also apply for another loan during an existing one. As provided in a survey based in America, the borrowers who apply for these loans more than 10 times in a year, account for minimum 60% of the advance deposit transaction and a minimum of 76% revenue.
Are these good banks?
Two bank regulators, recently provided that the banks must regulate to get rid of the deposit advance business. They also provided that the borrower cannot repay with another loan, as it is not effective and safe banking, as provided by the FDIC institutes.
Provided that, not all the banks who provide payday loans are good enough. The regulators are right; it is not a safe banking and many times it becomes risker for the borrower to pay back to bank than to a traditional lender.
Recently, many good banks have started to give small loans to the customers. In such case, the APR remains below 36% which is a healthy interest return. The largest banks, surprisingly have the best small loan offerings with the safest interest rate systems. On the other hand, the small banks have affected their reputation by offering higher interest rate loans.
Duration of bank loans
Small bank loans, like payday loans work at the same system. However, some banks that keep a minimum amount to be borrowed restricted to $500, have a duration of one month. Some banks however increase the amount of loan up to $1,000 and increase the repayment period to one month and one week or 6 weeks.
When applying for a payday loan, especially when you are keeping all your funds regularly in your bank to ensure that the bank gives you an overdraft protection. An overdraft protection helps you avoid crediting problems if you have made any mistake in the records of your account. Establish the rules and regulations of the overdraft protection a bank offers you, including what it covers and what it would cost you. Many banks offer a "bound protection" which covers the overdrafts of an individual from electronic withdrawal or checks, generally at a price. If you do not confirm with your bank if it would give you overdraft protection, it can benefit highly costly for you.
Banks Vs Traditional payday
It is hard to say. Payday loans or small loans are generally difficult to repay because of the short duration. Unless an employee is sure of having enough income to repay both the interest and total amount at the same time, it is generally as difficult in both cases. However, bank loans offer better security than traditional loans.
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