Are short term loans like payday loans?

I have discussed payday lenders in previous blogs and how much of a rip-off they are. Did you know that some banks and credit unions offer short-term loans to compete with payday loans?   These loans have many different names such as short-term, emergency, direct deposit advance and account advance loans.  They are usually for a short period of time and let you borrow up to $500.

Banks and credit unions don’t usually lend money to customers for emergency purposes.  Now there are more consumers without credit cards or savings accounts, who don’t have the funds to pay for an emergency. Banks and credit unions are offering these loans more than in the past.

Credit Unions

This is an example of what some credit unions require to qualify for a short term loan.  The consumer must be a credit union member for 30 days and have proof of income. A credit report is not required and there is no penalty to pay it off early.  They are charged an interest rate of 18 percent plus an application fee.  They don’t plan to make money on the loan because of the risk involved; they are looking to gain a member.  In addition, some may also conduct financial counseling. A customer is a member of the credit union and considered an owner, so credit unions don’t usually charge extremely high rates to their members.

Banks

Banks, unlike credit unions, are not as concerned about charging high interest rates to their customers. Their loan officers are aware that consumers are going to get the loans from somewhere, so why not get it from them?

One bank conducted a survey of their customers and found out that 30 percent of its online customers were using payday loans, check cashing, pre-paid debit cards or electronic bill paying. They offered a loan that was marketed as an advance loan. Customers could pay back a maximum loan of $500 in monthly installments for up to 6 months at annual interest rates of 120% to 262%.

Some banks offer loans to those with payroll, unemployment, disability or social security checks that are deposited directly into their checking accounts.  In these cases, the principal is deducted on their payday from their accounts.  If there isn’t enough to pay the debt, more charges are added onto the debt such as overdraft fees.  This can end up to be a longer term borrowing cycle, if they don’t have the funds.

Credit unions are offering these loans to gain customers, while banks are using it as an income source to make up for the loss in debit card fees.  Seventeen states have a rate cap of 36 percent, so consumers in those states can’t be gouged.

If you are really in need of a short-term loan, this is an alternative to the payday lenders.  Make sure that you shop around for a lower interest rate and can pay the loan off quickly. Credit unions are usually your best alternative.

Credit Damage Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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