Home Equity Line of Credit

Payday loans are becoming a problem in more and more towns, and legislators are trying to find solutions. These businesses specialize in small, short-term loans, generally less than $500. The fees they charge vary, but are normally in the vary of $15 for each$100 borrowed, payable in two weeks’ time. If someone wants to borrow $100, they write a check for $115, and two weeks later, they either pay it back or the loan company cashes the check. That may seem like a quite small amount to charge, but many customers of these businesses find themselves using them as a last resort and are generally unable to repay them. Once that happens, the interest acumulates. And 15%, every two weeks, amounts to 390% for each year, a far higher rate than can be had through most other kinds of loans. In fact, the interest rates charged by a lot of bank card institutions, which can run in the 25% range, seems quite reasonable in comparison.

Quick cash loans are looked upon with disapproval by legislators because the lenders are seen to prey upon the poor in society, who often do not have access to other lending choices, such as home equity loans or bank cards. With no credit report on such people, other loans simply aren’t possible. Many states have enacted rigid lending laws designed to regulate these businesses, but they typically circumvent these laws by working with banks in other states which have more lax lending laws.

A recent study suggests that banks could offer sensible alternatives in the form of temporary loans at more reasonable rates. In fact, Citibank is offering a combined line of credit and checking account, with rates in the 17% neighborhood. This could seem to be a nice alternative to lending at 390%, but a lot of banks are reluctant to offer such loans because they conflict with other existing bank products that are more profitable. Most banks realize a sizable portion of their products through their overdraft protection. Overdraft protection is a system that allows customers to write checks for more money than they have in their accounts, without worrying that the checks will be returned for inadequate funds. Instead, the bank pays the the check, and withdraws the overdrawn amount, plus a fee for the service, from the customer’s account at a later date. That fee, which typically runs about $30, applies to any overdrawn amount. If a customer writes a check for $1 more than he or she has in their account, the $30 fee applies, making overdraft protection a quite lucrative product for the banks that offer it.

When you can charge $30 for a $1 loan, with an effective 3000% interest rate, you are instantly less interested in offering cash at 17%.

As more and more legislatures become effective at regulating these businesses, some banks will enter the temporary, small loan business. It will just take time.