Between 1978 and 1980, federal legislation and a Supreme Court decision overrode most state laws that defined and prohibited usury. Banks were free from limits on the interest that could be charged on loans, including credit cards. Not long after that the payday lending industry took off, charging as much as $17.50 for every $100 borrowed. The interest rates for this type of transaction are staggering: 911% for a one-week loan; 456% for a two-week loan, 212% for a one-month loan.
Those rates would make a loan shark blush.
In fact, a recent article in the Washington and Lee Law Review cites the interest rate charged by mob loan sharks was often less than 200% annual interest rate.
So can you do better through your local bank? Not if you overdraft your account. The typical overdraft fee is less than $20, and average time it takes to pay it back is two weeks. The common overdraft fee is $35, which calculates out to an APR of 1000-3000%!
Some banks, like U.S. Bank, Regions, and Wells Fargo, offer a short term loan “service” for checking account customers with direct deposit. For instance, U.S. Bank customers can borrow anywhere from $20 to $500, and they pay $2 for every $20 that they borrow, to be paid in full within 35 days. That annualizes to about 100% APR. That may sound like a better deal, but consumer groups have made charges that the banks are deceiving customers about the true costs of its short-term loans. Recently North Carolina Attorney General Roy Cooper asked Regions Financial Corp. to provide data showing its loans don’t violate the state’s interest-rate cap. The Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau are also investigating payday-like products offered by banks.
If you are struggling to make ends meet from paycheck to paycheck, maybe it is time to speak with an experienced bankruptcy attorney. Payday loans and overdrafts can be discharged, so bankruptcy may be just the cure for your financial ills.