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Banks now offering payday loans
By Kris Kirschner/Eyewitness News Published: 03/03/2010
Indianapolis - Some major banks are getting into the payday loan business.
Often found on the street corners in low income neighborhoods, they offer cash until payday at a high cost. But now consumers can go to the teller of their local bank to borrow on the same idea.
“It's basically something that's designed to help a customer when an emergency occurs," said Natalie Guzman, Fifth Third Bank.
Fifth Third is now offering "early access" to direct deposit accounts. They are promoted as a way to help customers get through a financial emergency.
"Kind of like insurance. If something happens you've got something to get you through until you get paid," said Guzman.
The program works this way. A customer with a checking account at Fifth Third for at least six months can borrow up to $500. That loan is automatically paid off when the next paycheck is directly deposited into their account, plus a fee of ten percent of the loan or an annual percentage rate of 120 percent.
While the interest rate is much lower than you'll find at a so-called payday loan, consumer advocates warn the danger of going deeper in debt is still there.
"You definitely don't want this to be a long-term solution," said Dr. Rachel Smith, University of Indianapolis.
Smith teaches finance and economics at the University of Indianapolis. She anticipates the payday loan option to be a trend in banking.
"It's a combination of the fact that we're in an economic situation where there would be a demand for it in addition to the fact these banks are going to be losing money from fees that they're not going to be able to assess for overdraft protection," said Smith.
In the terms and conditions for the early access program, Fifth Third clearly states, "This is an expensive form of credit."
"It is a high cost. It is not a best option for credit," said Guzman.
It's not the best option, but some say it's better than the alternative for people who can't wait until payday.
Experts say putting aside money for emergencies is the best option, and if you can't, consider using a credit card that offers a lower rate.
Along with Fifth Third, both US Bank and Wells Fargo offer a "payday loan" program.
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