Why NOT to get your Short Term Loan from a Bank

Why NOT to get your Short Term Loan from a Bank 

Banking on (no pun intended) their traditional credibility, banks have started bombarding low-income consumers with slews of new products that carry heavy fees and high interest rates. 

Handcuffed by new laws that limit debit card processing fees, and credit card interest rates; and still reeling from the fallout of the financial crisis; banks are trying anything and everything to recoup lost profits.   

A few months back FICO announced that they were partnering to develop a new credit score that would take into account more data points in the hopes of enfranchising the low-income population into the credit game. While some critics feared that the added data points would only be used to further exclude low-income borrowers who have been struggling to find credit since the recession, others believed the new system was designed to help lenders create new products to cater to this under-served crowd.

A New York Times article that looked into this growing trend highlighted the story of a Minnesota man that went shopping for a new checking account, only to be offered prepaid debit cards, check cashing and money wire services, and even short-term loans that get deposited and withdrawn directly from the owner’s account, ad nauseum. While FICO’s motives are left up to semantics, the fact that some big banks are pushing risky products on their most impressionable and financially fragile customers is undeniable.  

Analysts point out that when dealing with borrowers with shaky credit, lenders are forced to hike up interest rates in order to mitigate the risk. This is true. But, having knowledgeable and educated bankers, who engender trust from their clients, pushing risky products like sleazy used car salesmen, and putting low-income families at risk, is simply unconscionable.   

Banks are entering an alternative lending landscape that is dominated by small independent businesses like payday loan lenders and pawnshops. Since the recession these businesses have been immensely successful, filling the void for banks that have taken a big hit, and for borrowers who are no longer desirable to banks that have tightened their lending policies.  

Banks have a big advantage in this new market, as they try to elbow their way in to the competition. Not only do their have their perceived credibility as prominent financial institutions to rely on, they are by large exempt from the new laws that restrict and regulate small alternative lenders.  

In the short-term loan, subprime lending game, high interest rates are unavoidable. As a borrower looking for a quick loan, you are probably better off with an accredited payday lender, who has interest rate limits and requirements to clearly display and explain all loan conditions, instead of a money-hungry bank operating in an unregulated landscape.