Banks are borrowing pages from the payday lending playbook

The changes are subtle, but has anyone noticed? It's getting a little harder to distinguish banks from payday lending establishments.

There are at least three major banks that offer cash advances to their customers, in the way that the often-criticized payday lending stores do. I just find it interesting because while the payday lending industry is often understandably blasted for its predatory lending, there isn't a lot of criticism aimed at banks in this area. Not that banks aren't being criticized these days because, of course, they get their share of scorn from the bailouts to the increasing overdraft charges.

But in case anyone is keeping score, these are the banks that I know of that offer cash advances, with links to each financial institutions page, which explains everything in detail.

Each bank has similar terms. You can borrow up to $500, and for each $20 you borrow, you pay $2, and you pay it back on your next direct deposit.

That winds up to a 120% APR (annual percentage rate), which is admittedly better than the payday loan establishments that charge 390-780%. But it's still not wildly generous of the banks, if you consider that, for instance, the nonprofit Americans for Fairness in Lending promotes capping the APR at 36%. (Its reasoning is that what's good for the military should be good for all of us: If you're a member of the armed forces, a payday lending store can't lend you money at higher than 36% APR.)

The banks take pains to note that, as Wells Fargo indicates on its web site, "this is an expensive form of credit. The service is designed to help our customers meet their short-term borrowing needs. Appropriate emergencies might be a car repair, medical care for you or your family, or travel expenses in connection with your job. This service is not intended to provide a solution for longer-term financial needs." It even goes onto suggest that you might think of other alternative sources of borrowing, like a "credit card cash advance" (yeah, great idea) or "borrowing from a relative."

I have mixed feelings about this, frankly. On one hand, sometimes people are short on cash, and if you have to feed your kids or pay your electric bill, and you've run out of money, it's nice, in theory, that there's a lifeline out there, whether in the form of a payday lending store or a bank. I've written before on WalletPop that, as a freelance writer who doesn't always get paid by publications as quickly as I'd like (AOL excepted; they give me direct deposit once a month, like clockwork), I've felt cornered enough to use payday lending services. And, yes, while I was chagrined, I was also grateful when the lady behind the (bullet proof?) plastic screen handed me my cash.

And banks, like the payday lending industry, are simply going where the money is. They're a business involving money. Why shouldn't they try to steal the business of some of their competition. One could also argue that they're simply fulfilling the needs of their customers. And there is that.

But in some ways, it seems even more predatory for a bank than a payday lender to offer these cash advance loans to their customers. Not just predatory, but I wonder if some banks aren't feeding on their weakest customers, sort of in a Soylent Green sort of way that may catch up with them eventually.

In theory, someone could wind up in quite the subservient relationship with their bank. The bank offers that $500, and the customer takes it, paying $550 with their next direct deposit. The $550 instantly disappears from their checking account, and they're short on cash, so they take out another cash advance. And so it goes. The banks on their web sites state that they won't let a customer do this any longer than six months in a row, but the wording can get interesting. For instance, Fifth Third says that they won't lend money to a person if "you have advanced your maximum credit limit in each of the past 6 consecutive months."

So this cycle of debt could continue indefinitely if, after, say, four or five consecutive months of borrowing, the bank advanced the customer less than their maximum credit limit of $500. Or maybe I'm just being paranoid. Regardless, this service has the potential to get a customer in a cycle of debt for a long stretch of time.

At least customers who use payday lending hopefully think about it for awhile before physically driving or taking the bus to the brick and mortar establishment. All it takes for a customer at Wells Fargo, Fifth Third and U.S. Bank to get a cash advance is a few clicks of the mouse.

On the other hand, maybe it won't be long before payday lending stores start offering customers their own cash advance accounts online, making it even easier to go into hock. These days, increasingly, banks and payday lending services are starting to look indistinguishable.

Geoff Williams is a frequent contributor to WalletPop.

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