Rant Part 1

Ok. I use this blog to become educated on the topics of my choice and to send my ideas into the abyss in hopes that someone smarter than me will engage me and push me towards better ideas. Ideas that we can make work for others and make a difference in consumers lives.

I read an article about a bank stopping their "ready advance loans" in North Carolina. Advocates of stopping such loans were overjoyed that this payday loan equivalent was shut down and that North Carolina is still payday loan free.

In an ideal world, I agree that to borrow money as a consumer should be limited and that families will find peace of mind by living within their means.

But seeing that we are still in a recession, and that there is still economic uncertainty shrouding the horizon, it seems illogical for people to cut off an entire segment of the under-banked consumers.

It is great that these "advocates" are so against these payday advances and yet a majority of the users to these products are the ones paying the most in overdraft fees. Lets take for example Regions Bank. Their ready advance loan is $10 for every $100. However, an overdraft fee is $36.

If a family is constantly overdrawing their account, paying $36 per item when they could be paying only $10 per $100, it seems like a no brainier. Some could argue that this is not a good deal if a person overdrafts their accounts with rent checks for a large dollar amount, but I would like to point this out. Duh. Yes I said Duh- remember the context of my rant is focused on the vast majority of under-banked customers.

Under-banked in the way I am defining it are individuals who cannot qualify to use some or many of the banks products and services. The majority of overdrafts are not large payments, they are the lattes, the Hulu, Netflix, and the Red Box purchases. Families that are poor in money management, families that are turned impoverished by loss of partial income, or job, families that are just squeaking by and have an emergency greatly benefit from a product as described from above.

And an incredible point to make, is because of consumer protection laws individuals can "opt out" of overdraft coverage, meaning their debit card will be turned off for daily purchases if there is not more money in the account, thus avoiding overdraft fees. But people still ask to have their debit cards left on! Why do they do this? Remember people are not always rational. People make emotion based decisions often which leave the statisticians stunned.

Here is a great report done by the Consumer Federation of America. They looked at the annual percentage rate (APR) of overdraft fees, let's compare them to "advances" and "payday loans". Keep in mind that Regions advance is 120% APR. According to the report Regions APR on an overdraft of $100 for 2 weeks is 936% APR.

Like medicine appropriately applied, payday loans and advances can be helpful, but when overused and abused it can become financially deadly, oddly enough, that is how most things are in life.

So way to go you awesome advocates, rather than address the issues of customer education and economic recovery you just took away one of the the kindest things a bank could do, give a customer more money for less.

Stay tuned for Rant Part 2. I will be talking about where there is a BIG gap in banks and their approach to the student segment.