The payday lender rip-off: Who gives them the money they give you?

See that garish neon sign down at the local strip mall that says “Payday loans!”

If you’re ever short of cash and think a “payday loan” or “payday advance” sounds like a reasonable idea, there are two things you should know before you walk in the door. (1) The money for your payday rip-off is provided by the same big banks you bailed out with your tax dollars, and (2) The interest rate payday loan lenders charge is so high it would make a loan shark like Tony Soprano blush.

In fact, according to a report by WFAE, the payday loan industry wouldn’t exist if it weren’t for Wells Fargo and Bank of America:

“These banks were bailed out by the American taxpayer and they need to stop investing in an industry that thrives off bilking the American taxpayer,” says George Goehl, executive director of National People’s Action, a community advocacy group that co-sponsored the report. It estimates big banks extend as much as $3 billion in credit to payday lenders each year. 



Wells Fargo is the largest funder with a lead role in financing six of the nation’s largest payday lenders. According to the report, Bank of America and its subsidiaries own more than a one-percent stake four of the top five publicly-held payday lenders. Neither bank disputes the report, but both say they put payday lenders through a strict screening process to qualify for funding… 



And a very lucrative business is it according to Kevin Connor, a spokesman for the Public Accountability Initiative and co-author of the report. He claims that the big banks cleared a cool 70 million smackers on their loans to payday lenders in 2009: 


“That gives a sense of how much is going into these banks pockets – especially when they’re borrowing at near-zero interest rates from the Fed while payday borrowers on the other end of the cycle pay a typical rate of 455 percent,” says Connor.

Is that possible? Is it legal? Is it correct? Naturally, a spokesman for one leading payday loan company disputes the figures:



The typical fee for a 2-week payday loan is $15 per $100 borrowed. Advance America spokesman Jamie Fulmer says it’s unfair to calculate that interest on an annual basis because customers don’t take out a new loan every two weeks. He says the average is 7 or 8 loans per year for Advance America customers who typically don’t have access to other forms of credit. 



“The premise of the report really ignores the fact that millions of Americans choose this product each and every year because it meets their needs,” says Fulmer. 



And he says Advance America couldn’t meet those needs without a substantial line of credit from BofA, Wells Fargo and other banks.

We’re not exactly financial wizards here at IHateTheMedia, so feel free to correct our math, but it seems to us that using Fulmer’s figure of $15 in interest every two weeks on a $100 loan equals $7.50 in interest per week. That’s 7.5% interest per week. Not per year, but per week. That means you’d pay an annualized interest rate of 390% for the honor of borrowing Bank of America’s or Wells Fargo’s money.

So Fulmer is correct. 390% is a far, far better deal for payday borrowers than 455%.

Bada Bing!

Source: WFAE.org