Financially strapped consumers certainly aren’t catching a break from their banks when it comes to the ever-escalating fees and minimum balance requirements for checking accounts and fees and surcharges for ATMs.

There are far safer havens for savvy customers, and if you can live with a free checking account, which generally means no interest, you’ll do your finances a favor.

Here’s what Bankrate found in its 2008 checking study:

-Bounced Check Fees hit New High Again

-ATM Surcharge and fees continue climbing

-Interest Accounts Require High Minimums

-Online Banking Can Be Pricey

Methodology: Bankrate.com surveyed one interest checking account and one non-interest checking account at each of the largest banks and thrifts in each of 25 large markets to find the latest trends on checking account and ATM fees. There were 247 interest accounts and 226 non-interest accounts surveyed at 249 banks and thrifts in the top 25 metropolitan areas.

Cash Advance and Payday Loans pricing remains flat amongst the non traditional segment.  However, as banks and credit unions begin to offer these products, they are increasing their pricing as they find the right pricing point for their customers.

Bankrate.com also looked at 22 checking accounts at 18 institutions offering online accounts and compared them to their brick-and-mortar counterparts.

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Just over a week ago on December 3, 2008, the Federal Deposit Insurance Corporation (FDIC) released a study on the impact of bank and credit union overdraft protection programs.   Simply stated, the results were not pretty for the average consumer.  The study revealed that over 70% of depository institutions automatically enroll their customers in some form of overdraft protection programs,  programs that can charge depositors upwards of $35.00 per bounced transaction.  In some instances, availability of these programs can serve as a life preserver to cash-strapped consumers.  Overdrafts are often used by consumers when they face the prospect of bouncing a check.   The bank helps the consumer by paying the check, but putting the depositor in the red at $35.00 a pop.   Sometimes this proves helpful to consumers and other times not so helpful.   The FDIC in their December report gave consumers additional help by revealing the true cost associated with these loan products.

The FDIC study showed that the APR on these products (this is the first time the FDIC formally acknowledged that an APR might be a useful measurement of cost when discussing overdraft and non sufficient fund fees)  can exceed 3,520%!!!! The FDIC reveals that banks alone generated almost $4 billion (BILLION) in additional fees thanks to overdraft and NSF charges in 2006 alone.   These products have proven to be a source of easy money for banks and credit unions, especially in light of the shrinking real estate and commercial lending sources.

When faced with paying these fees, consumers should be aware that cheaper alternatives exist.   Clint Says does not call for the limitation of choice when it comes to personal financial needs, even when it comes at the expense of a 3,500% APR.  However, the FDIC made a smart choice when it used the universal measuring stick of APR to reveal how expensive this form of financing is.   For years, other forms of short-term lending such as payday loans, cash advances, and credit card debt has been under the close scrutiny of state and federal regulators, in large part to the triple digit APR associated with their use.   However,  these alternative credit products deserve a second look by consumers needing short-term cash, especially when the cost associated with them is much cheaper than alternatives like overdraft protection fees and bounced check charges.

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The Motley Fool published an interesting article about the largest payday lender in the United States. No, not Advance America, CashNetUSA, or Check-N-Go. It’s Well Fargo. Thats right, the bank you probably use for checking or a mortgage is in the business of payday lending. If you are disappointed by the fact that you can’t get a cash advance loan through Well Fargo take heart. US Bank, a major competitor of Wells also offer their own payday advance product. Chances are if you need a short-term loan a bank or even your local credit union (yes, they are in the business too, just Google the term “CU on Payday.”)

The Fool points out that the fees charged by these two large bank and a dozens of fee-funded credit unions are often as high as your local payday lender. Cash advance lenders suggest, and a number of studies by universities and accounting firms have shown, that the high fees charged by payday lenders is justified. However, to say the risks to depository institutions and private lenders are the same is untrue. Credit unions and banks have a leg up on the short-term lenders and on their borrowers. When a borrower utilizes their credit union or bank for a short-term or payday advance the credit union ensures the borrower has direct deposit. With direct deposit, the risk to the bank or credit union is minimal. The fees charged by the credit union or bank don’t appear to be justified. The profit margin for depository institutions on these loans is large, and in light of the ongoing credit crunch, they are a bright spot in an otherwise dismal lending landscape.

It is little wonder that some of the loudest critics of payday lenders are banks and credit unions. Could it be that payday advance lenders offering personal loans are an unwelcome competitor to banks and credit unions? As criticism of cash advance lenders has increased in the last few years interested parties should be suspicious of credit unions and banks who claim that short-term lenders are hurting consumers. If that is the case, then what are these depository institutions doing by offering the same loan products?

Clint Says read with some interest a statement from the North Side Community Federal Credit Union, located in the fair city of Chicago. North Side has caught the vision of how to better offer payday loans, cash advance loans, and other short-term credit products as its introduced its “PAL” program. Here are the details of their payday loan alternative:

-Average loan is $500 ($75.00 of which the credit union doesn’t allow the borrower to use, so the true principal loan amount given to the consumer is $425.00.

-An “reasonable” APR of 16.5% (why are the payday guys out of business yet? Let alone subprime credit card providers?)

-A $30.00 “application fee” (Why doesn’t this get rolled into the APR?)

-Hopeful borrowers must attend 4 financial education seminars (Can you see someone who needs an emergency loan waiting around to complete the four part series? Me neither).

Of course, the program superficially looks good to consumers, and why not? 16.5% APR verses a 391% APR product? You would have to be a fool to choose the more expensive loan. The question that interested policy makers and informed consumers should ask is, “why does the program have fewer than 1,000 participants in a city of nearly 3,000,000 individuals?” I can assure you its not because the credit union lacks a decent marketing budget.

In a press release from NSCFCU about the PAL program a couple of years ago, the organization, which relies heavily on bounced check and courtesy overdraft charges (60% of fees according to a recent article by Forbes Magazine) bemoaned the fact that at the time it was only charging those in need of short-term loans a $10- application fee, to quote the release:

“We currently charge only a $10 application fee for the loan. Increasing this fee to $20 would at least help cover our costs of the program.”

Since then, the program has increased is self proclaimed innocuous “application fee” from $10.00 to $20.00 and then to $30.00. Does the $30.00 fee cover the program costs? A look at the NSCFCU loan product using a comparative APR will shed more light on the application fee.

Remember the terms of the loan? $425.00 in principal, 16.5% APR, and a $30.00 application fee. To calculate the APR we need the duration of the loan. The vast majority of cash advance loans are repaid in 13 days (NSCFCU gives a borrower up to six months, but verifiable consumer behavior shows the majority of these loans are paid in full after two weeks). When calculated on a a two week basis the credit union payday alternative loan’s APR is 231.02% compared to a payday loan of 391%. Payday lenders have claimed that at the interest rates they charge they receive a paltry 6.6% net profit or the same as an average Fortune 500 company in 2007. Patrons should not be surprised when the CU asks for an increase in the “application fee” from $30.00 to $40.00 in the near term to help them break even.

Regardless, the alternative loan product remains somewhat cheaper, but why the continued lack of interest?

The requirement to go through weeks of financial seminars although noble and good, is unrealistic for many people who rely on short-term loans to help meet unexpected financial issues. All people who use cash advance loans are employed. Many work two jobs to get by. The last thing these working and middle class people have time for when they are in a bind is a four-week series taught by someone who looks down on the way they have handled their finances. What the credit union doesn’t realize or simply don’t care about, is these classes create a burden more costly that what they would pay at any online cash advance or payday loans provider. Time in many instances is more precious than saving a few dollars (the cost difference between most payday alternatives and cash advance products).

Payday advance and pre-paid VISA card providers have and will continue to succeed in their mission to provide short-term credit at reasonable prices because they have put themselves in the shoes of their borrowers.

This is a great article.  I had my credit union pitch me on this too a couple of months ago. -TS

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I read with some interest an article in my credit union’s quarterly newsletter about a new loan product that they heralded as a great alternative to payday loans. The article claimed that members of the credit union could avoid the triple-digit APR of payday loans and enjoy the convenience of having the loan issued and paid back to a credit union they trust. The article rehashed the common issues associated with payday loans and touted its own alternative as the better solution. At first glance the product does seem to be a better alternative to cash advance loans. However, when one takes a closer look at the credit union’s product it becomes apparent that it is nothing more than a traditional payday loan, disguising its fees in terms other than an APR, and with more strings attached than what a consumer would experience with a traditional cash advance lender.

Credit unions have been under pressure for some time to offer a consumer friendly alternative to payday loans. Credit unions have been heralded as the champion of the individual and seen by many people as a better choice over banks when it comes to managing personal finances. However, credit unions have been slow to develop a payday loan alternative for two reasons:

1) It decreases the profits they generate from their more lucrative products such as late fees and overdraft protection services.

2) Credit unions cannot offer the product for substantially less than payday lenders.

As a recent Forbes article revealed, most credit unions receive the majority of their income in hopes that their members forget to balance their check books. The article stated that credit unions rely on bounced check fees, overdraft protection product, and late payment fees for the majority of their income. By offering a cash advance loan alternative to its members, credit unions stand to lose a large portion of their income. Instead of offering payday advance loans, many credit unions have chosen to publicly participate in the fight against cash advance lenders. Some speculate that credit unions have become so vocal against these loans because they stand to lose so much.

The second reason credit unions have avoided offering a payday alternative is because they cannot offer it for substantially less than what cash advance lenders are issuing their loans for now. For example, the credit union that sent me the newsletter offers its $100 “payday alternative” at 18% APR (sounds good, right?) but then they also charge a “participation fee” of $30.00. When you calculate the APR on that 30 day loan (with the participation fee) you can expect to pay 383% APR, which is about the same a payday lender. The credit union may explain away this charge by saying the risk associated with the loan justifies the higher rate. However, the credit union has unfettered access to the borrower’s bank account and pay check through the credit union’s direct deposit requirements. Reputable cash advance providers do not force their borrowers into wage assignment like credit unions do with their product.

Some credit unions have attempted to offer payday loans at a lower rate but with limited success. Credit unions in Pennsylvania were given government assistance (i.e. taxpayer support) to help float a low APR payday alternative. In the end, many of the Pennsylvania credit unions were not repaid by borrowers and they were forced to terminate the services, leaving taxpayers to foot the bill.

Borrowers are right in seeking out the low cost cash advance lenders. In the past, credit unions have been good choices for consumer-minded loan products. However, in light of the problems with credit union payday alternatives such as hidden fees and the high probability of program failure, consumers should seek out lenders who truthfully disclose the fees associated with the loan and who have a proven track record of successfully issuing cash advance loans while providing consumers the safeguards they deserve. As always, consumers seeking short-term loans should use them responsibly and use lenders who adhere to CFSA’s best practices.

About the Author:
Michael New Jr. is an authority in the financial industry. He has written hundreds of articles relating to consumer services and Payday Loans. Contact Info: Michael New miken@leadgenix.com http://www.leadgenix.com

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