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Direct-deposit loans: ready cash, high fees

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Highlights
  • Direct-deposit loans enable customers to borrow money against their next paycheck.
  • The loans are due in full when the next deposit comes into the bank.
  • A study found borrowers of this type of loan are in debt for 175 days of the year.

Consumers in need of a quick emergency loan no longer need to rely on a payday lender. Increasingly, banks are offering what they call direct-deposit loans, giving customers access to short-term advances. But, buyer beware. While they aren't called payday loans, they share some of the same characteristics.

Direct-deposit advance loans "operate and function just like payday loans," says Diane Standaert, an attorney with the Center for Responsible Lending, the Durham, N.C., nonprofit working to prevent financial abuses. "They have the same devastating impact."

Direct-deposit loans, which are offered by banks including U.S. Bank, Wells Fargo and Regions Financial, enable bank depositors to borrow money against their next paycheck, Social Security check or unemployment benefit that is directly deposited in their account.

Banks that offer these types of loans say their products are different from payday loans because they have lower interest rates than traditional payday loans, and loans are made only to existing customers. In most cases, customers can only borrow up to a maximum of $500, but some banks, including Wells Fargo, limit the loan to half of the direct deposit or $500.

The idea behind direct-deposit loans is to give customers access to emergency cash for which the bank is automatically reimbursed a few days to a couple of weeks later, depending on when funds are deposited in their bank account.

A center study says the loans can have an annual interest rate of 365 percent based on the typical term of 10 days.

Unlike a payday loan in which the consumer typically has 14 days to pay it back, with direct-deposit loans consumers may not even have the money for a full 14 days before it's repaid, says Lauren K. Saunders, managing attorney at the National Consumer Law Center, the Washington, D.C., nonprofit advocacy group.

"Depending on how long the loan is outstanding, the interest rate can be 300 percent to 400 percent," Saunders says. As soon as a direct deposit comes into the account, "which could be three days later," the bank takes the money plus interest, she says.

Direct-deposit loans aren't cheap

In June, the Office of the Comptroller of the Currency, which regulates banks, proposed guidelines for direct-deposit loans, warning banks not to automatically enroll consumers and urging banks to limit repeat loans and to clearly disclose fees.

Jean Ann Fox, director of financial services for Washington, D.C.-based Consumer Federation of America, the consumer advocacy group, says banks provide "voluminous disclosures" on these types of loans. But the information only refers to a loan held for a full year, not as if it was paid back in a few days.

Wells Fargo charges $1.50 for every $20 borrowed up to $500, while U.S. Bank charges consumers $2 for every $20 taken out up to $500. Regions Financial charges $1 for every $10 borrowed up to $500.

Richele Messick, a spokeswoman for Wells Fargo, says direct-deposit loans are available to consumers that have established relationships with the bank and have a recurring direct deposit into a checking account. While Messick says the bank makes it clear this is an expensive form of credit, she says there is a need for this product because it's designed to help customers through an emergency situation. "It's not intended to solve longer-term financial needs," Merrick says.

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