Call it an emergency faxless cash advance. Call it “proactive” overdraft protection. Just don’t call it a payday loan.
At least that’s how U.S. Bancorp and Wells Fargo & Co. prefer it.
The two companies offer direct-deposit checking customers cash advances on future paychecks. The two banks charge a 10 percent fee for loans up to $500, which is automatically repaid when the customer’s next paycheck is deposited in the account.
Payday loan lenders, by contrast, have an upfront charge of anywhere from 15 to 25 percent per loan.
Trent Spurgeon, vice president of product and segment management for Minneapolis-based U.S. Bancorp, justified the company’s 10 percent fee, noting that it is less than half of what traditional payday advance lenders charge, which includes “hidden costs” such as late penalties and renewal fees.
Moreover, he said, U.S. Bancorp offers the service to all direct-deposit customers, regardless of their credit histories.
Nevertheless, the direct-deposit loans are very lucrative for the banks, experts say. U.S. Bancorp and Wells Fargo earn an annual interest rate of about 120 percent on each loan. Plus there is little risk to the banks because they automatically deduct the money from the consumer’s direct-deposit account, said Bart Narter, a banking analyst with Celent, a management and consulting firm in Boston.
“I think they will make a bundle out of it,” Narter said.
Neither U.S. Bancorp nor Wells Fargo will disclose specific numbers related to the programs, calling such data proprietary.
Bank officials say the cash loans, dubbed direct-deposit advances, are strictly meant for emergency needs, such as car repairs or medical expenses.
The service is “a quick and simple solution to people who have no immediate access to other forms of credit,” Spurgeon said.
Cash-strapped consumers can also use the loans to prevent overdraft fees from bounced checks, he said.
“Payday loans carry certain [negative] connotations,” Spurgeon said. “We serve the same needs, but the products are different.”
For one thing, U.S. Bancorp, which rolled out the product about a year ago, is very clear about the terms and conditions of the loans, he said.