The Banks' Latest Secret Trap Door
from daveramsey.com on 27 Mar 2012
The big banks are under fire again.
What for this time, you ask? It seems the banks have an unpublicized loan called a “deposit advance loan.”
Basically, this loan allows checking account holders to get an advance on their upcoming direct deposit. In turn, the banks charge them in the neighborhood of $2 for every $20 they want advanced. Those numbers work out to APRs of around 120%.
This isn’t necessarily a new type of loan. Wells Fargo has offered them since 1994, and since then, several other banks have entered to the deposit advance mix. These loans are easy money for the banks but terrible news for account holders—in one analysis, the average borrower stayed in debt 175 days.
It’s Time to Advocate for Change
These banks are only recently under fire because nearly 250 advocacy groups have petitioned federal regulators to prevent banks from providing these loans.
The obvious criticism is that deposit advance loans operate with interest rates in the neighborhood of payday lenders. And that’s not a good neighborhood to live in.
The Center for Responsible Lending says the loans are designed to trap people. One study by the center show that the average person who takes out one of these loans is in debt for 175 days, only slightly less than the average time in debt for a payday borrower (212 days).
The banks say this loan is designed to help their consumers through an emergency situation. So what they’re telling you is that you can fix debt with more debt.
But this is exactly why Dave teaches that the emergency fund is a vital part of your financial plan. When you have a $1,000 in savings (Baby Step 1) or 3–6 months of your expenses in savings (Baby Step 3), you don’t have to worry about begging your bank for a horrible short-term loan with a horrible interest rate.
The other answer to this problem? Spend less than you make by using a monthly budget. This isn’t rocket science. But too many people approach the end of the month and realize, “Oh no! I’m out of money!”
That’s when they make bad decisions, like a deposit advance loan.
These loans are yet another way the banks have made it easy for you to mess up your money situation. Don’t fall into this trap.
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