Short-Term Loans

Short-term credit providers play a critical role in the U.S. financial services market by extending capital to a population in need of small-dollar loans.

The demand to meet the need for immediate, unsecured, short-term credit has grown in the past decade with the market now exceeding $115 billion [1], including bounced check fees, late bill-payment fees, and short-term loans. Bank overdraft protection and salary or short-term advances are among a number of options available to consumers facing unexpected and unbudgeted expenses.

Confronting a budget shortfall, a consumer may overdraw their checking account, triggering a “bounced loan” through overdraft protection or choose an advance through a short-term lender. While both options provide consumers with short-term access to funds, there are important differences between the two.

Short-Term Loan advance fees paid by consumers pale in comparison to those paid in overdraft fees

  • In 2007, storefront short-term lenders provided 154 million loan transactions and collected roughly $6.8 billion in fees. [2]
  • In comparison, it is estimated that consumers will overdraw their accounts 1.22 billion times this year, allowing banks and credit unions to collect more than $35 billion in overdraft fees. [3]

Short-term advances are highly regulated

  • State laws heavily regulate all aspects of payday lending, including limiting the number of loan transactions and placing caps on loan transaction amounts and the fees that can be charged. Short-term loans are also subject to a number of federal laws that protect consumer credit borrowers, including full disclosure of the fees expressed both as a dollar amount and an annual percentage rate. [4]

Bank and credit union overdraft transactions have no such regulations.

[1] http://www.cfsa.net/policymakers/market_demand.html

[2] Present and Future of the Payday Advance Industry, Dennis Telzrow, CFA, Managing Director, Research, Stephens Inc., March 6, 2008

[3] Overview NSF/OD National Analysis, Bretton Woods, December 2008

[4]  http://www.cfsa.net/knowyourfee/index.html

Short-term advances can be a less costly alternative to overdrawing a bank account

  • Short-term lenders typically charge a flat fee of $15 per $100 borrowed, or 391% if quoted as an annual percentage rate (APR). [5]
  • FDIC reports that the average bank customer pays $27 (median overdraft fee) to cover a transaction of $36 (median transaction size), with annual percentage rates ranging from 1067% to 3520% APR. [6]

Short-term advance fees are fully disclosed before customers enter into the transaction

  • Short-term lending customers must make a conscious decision to apply for a short-term advance and must take proactive action to do so. Before entering into the transaction, the fee and terms of the advance are fully disclosed to the consumer. In addition to the information found in brochures and loan-agreement forms, payday lenders post their fees — in both dollar amount and APR — in large type on poster-size displays in all stores.
  • The majority (75%) of bank customers are automatically enrolled in overdraft programs when they first open their bank account. Even when overdrawing their account using a debit card or withdrawing cash at an ATM, customers are not alerted to the pending overdraft or fees associated with the transaction. Many banks offer a tiered fee structure, where the fee increases based on the customer history with overdrafts. And making it even more confusing, banks tend to process the largest debits first – which can increase the number of overdrafts.

Short-term lenders offer substantial, self-imposed consumer protections

  • Under Best Practices mandated by OCLA, any customer who cannot pay back his or her loan when due has the option of entering into an extended payment plan, allowing them to repay the advance over a period of additional weeks. This option is provided to customers for any reason and at no additional cost. [8]
  • Bank customers who have overdrawn their account risk being assessed additional fees daily or pay interest on accounts that remain in negative balance. [9] Other than depositing all of the funds necessary to cover the overdrawn balance, customers have no way to work out of their bounce-loan overdraft debt.
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