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According to the Washington Post, (11/21/13) the government is imposing tougher restrictions on banks that offer short-term, high-interest loans that have been blamed for trapping some Americans in a cycle of debt.

Both the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp issued identical guidance to limit the risks of loans tied to consumers’ paychecks, government benefits or other income directly deposited into their bank accounts.

The huge problem facing consumers are what banks call deposit advance loans also referred to as Early Access or Ready Advance which are really payday loans.

Payday loans have long been criticized for abusive high interest rates and balloon payments.  Now banks, such as Wells Fargo, are offering similar loans which force the borrower into a endless cycle of paying off the same loan time after time, after time.

woman strangling and upside downBorrowers typically pay up to $10 for every $100 borrowed, with the understanding that the loan will be repaid with their next direct deposit. If the deposited funds are not enough to cover the loan, the bank takes whatever money comes in, then tacks on overdraft fees and additional interest.

States are taking different approaches to deal with this problem.  At least 15 states have already banned the service, others have imposed strict laws to limit the interest rates and the number of loans that can be made.  Some have implemented a “cooling-off period” which limits more than one deposit advance during a monthly pay cycle.

We have several videos on our web site.  Below are a couple that might be of interest:

  • “Options to Bankruptcy, With Notes on Getting Help”
  • “Meet Ms. Drain and Suggestions on How to Hire an Attorney”

I agree that people have a right to make financial decisions that are best for their family.  The problem with deposit advances and payday loans is that the borrower will rarely be able to get out of the borrowing cycle.  One time use of this option is not the problem.  The problem is the person who borrows, then has to borrow again to pay the last loan and on and on.  It appears that the advertising for these loans are focused on low income and minority borrowers.

What do you think about these types of  loans?

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Diane L. Drain

Diane L. Drain, bankruptcy attorney, retired law professor, mentor and community spokesperson.

About Diane Drain:

Diane is a well respected Arizona bankruptcy and foreclosure attorney. As a retired law professor, she believes in offering everyone, not just her clients, advice about bankruptcy and Arizona foreclosure laws. Diane is also a mentor to hundreds of Arizona attorneys.

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