Banks have maneuvered their way into the payday loan industry. These days there are many bank institutions providing short-term loans in the same manner as online lenders. Although they may follow the same basic loan principles, these "traditional lenders" have more freedom as far as having to follow state guidelines.
It's not easy for many people to get a traditional bank loan. People with poor credit history, a low FICO score, or a high debt-to-ratio are finding that banks are rejecting their application for a loan. It's hard enough having to go through these qualifications to buy a home or car. So getting a personal loan for a much smaller amount is a need for many people. Personal loans through banks that require collateral are tough to obtain as well. With the demand for the short-term loans as high as it is, banks and credit unions are booming with business.
These lending institutions have set up a system for payday loans that is similar to payday lenders. The consumer gets the cash they need deposited into their bank account overnight and that amount is automatically withdrawn when the borrower's next paycheck goes into their bank account.
What is the difference between traditional lenders and online payday loans lenders? It's more about the process itself. Banks don't have caps on loan amounts. The state that online payday lenders are in can regulate the amount in which someone can borrow; the banks aren't subject to this rule. Some states have even banned payday lending altogether but consumers can still go to a bank to take out a short-term loan. Banks and credit unions ultimately come out having a better reputation because they are not state regulated. This still doesn't mean consumers will stay out of trouble and out of debt by borrowing with these types of loans.
The key to these short-term loans is that they be paid off fast. If the borrower isn't prepared to payback the loan in full when the bank goes to withdraw the repayment amount, this may cause a person to go out and get a second payday loan to cover paying for the first one. This could inevitably cause a terrible domino affect in a person's finances.
Bank's have much more leverage when it comes to a borrower's account. Consumer's are forewarned about the potential for overdraft charges, negative credit reporting, and the ability to tap into the borrower's account should the loan not be paid in full. A bank can even freeze the consumer's account until the balance is repaid.
