The wit and wisdom of the Payday Pundit will be back on Monday.   

Instant shift offers this advice to consumers:

The best advice If you’re really in a pinch, opt for a cash advance on your credit card (about 28 percent in interest, plus transaction fees). If you belong to a credit union, you can usually get up to 18 percent interest on small unsecured loans. As an alternative to payday borrowing, The FDIC launched a pilot program in February in which 550 banks branched in 27 states will offer loans of up to $1,000 at an APR of up to 36 percent. That’s high, but it beats 500 percent.

What they fail to mention is that while banks and credit unions may offer credit with rates less than 36% APR, they also add in annual fees, application fees, transaction fees, etc…When you add up the total cost of the loan, it is clear why the $15 per $100 charged by payday lenders is a popular option. 

Treasury Secretary Henry Paulson, warned that “millions of Americans cannot find affordable financing for basic credit needs,” when he announced a major expansion of the federal bailout on Tuesday – as much as $800 billion to make mortgages and consumer credit more available and affordable.

According to the AP:

The Federal Deposit Insurance Corp. said Tuesday the list of banks it considers to be in trouble shot up nearly 50 percent to 171 during the third quarter—yet another sign of escalating problems among the institutions controlling Americans’ deposits.

We’ve had profound problems in our financial markets that are taking a rising toll on the real economy,” said FDIC Chairman Sheila Bair in a statement, adding that Tuesday’s report “reflects these challenges.”

Recently, community banks—defined as those with assets under $1 billion—have started to show similar stresses as their larger counterparts, the FDIC said.

The Credit Union Journal is surveying their readers to find out if credit unions, “given the economy”, are offering payday loan alternatives.

Survey: Given the economy, we:

Bankrate’s 2008 checking study found if you bounce a check, you’ll pay an average of $28.95. That’s 2.5 percent higher than last year. If you’re lucky, that’s all you’ll pay. Too often, even occasional check bouncers fall victim to banks’ practice of paying the largest check first when they’re clearing several checks received around the same time. If that first check drains your account and there are three or four smaller checks behind it, you’ll get clipped for multiple NSF fees.

Bounced-check fees by year:

As detailed in this article, the online lending business is booming.  Members of CFSA who offer payday loans online are required to follow the laws of the state of the borrower.  Unfortunately for consumers, many online lenders are located offshore and are completely unregulated.

Wouldn’t it be better to allow brick and morter payday lenders to offer the service instead of driving consumers to Google to search for an online lender?

From a report by the Credit Union National Association and the National Credit Union Foundation, “Payday Lending: The Credit Union Way.”

Let’s consider some alternatives for the working mom who is short $100 until payday, 14 days from now. She could get a $100 payday loan, pay $15, and the APR for that two week loan would be 391 percent..

She could also choose to write a bad check and pay an average of $48 in NSF and merchant fees. That would be a comparable APR of 1,251 percent!

Even if she has courtesy pay with her credit union, the average fee is $25, or an APR of 650 percent. Another option for her might be to not pay the $100 minimum balance due on her credit card, resulting in a $26 late fee—678 percent. If she chooses to not pay her $100 utility bill which may result in a $50 late or reconnect fee, that’s a comparable APR of 1,304 percent!

The argument can be made that by securing a payday loan to solve her cash flow needs, this woman is taking a proactive approach to her financial dilemma.

The Center for Responsible Lending indicates the 11 states that banned or limited payday lending saved consumers $1.4 billion in fees in 2006. But eliminating local payday lending activity does not eliminate the need for emergency cash loans. People still come up short prior to payday and the center does not address how these consumers managed their cash-flow problems. If they had to use one of the other alternatives, or had to drive to an adjoining state that made payday loans, or used the Internet to get an even higher priced loan, it is possible consumers in these states paid even more to solve their cashflow problems.

The Wall Street Journal reports:

In some cases, banks’ former darlings — consumers who paid consistently and on time but let their balances ride — now are being hit hardest, asked to stomach higher interest rates and fees or try their luck with different card issuers.

Exerpt from the article:

…a study has suggested that merely moving payday lenders out of an area without providing a better alternative hurts consumers. The study was authored by Jonathan Zinman, an economist who recently co-authored a study for the Filene Research Institute on how consumers use debit and credit cards (see story page 18). Zinman is an assistant professor of economics at Dartmouth College.

In his study Zinman studied the effects of an interest rate cap on payday loans put into place in Oregon in July of 2007. The cap essentially limited payday lenders in Oregon to charging $10 per $100 lent and set a minimum loan term of 31 days. The majority of payday lenders in the state left.

Zinman’s study, funded in part by payday lenders through contributions to the Consumer Credit Research Foundation, found that consumers suffered after the departure of payday lenders.

“I find that the cap dramatically reduced access to payday loans in Oregon, and that former payday borowers responded by shifting into incomplete and plausibly inferior substitutes,” Zinman wrote. “Most substitution seems to occur through checking account overdrafts of various types and/or late bills. These alternative sources of liquidity can be quite costly in both direct terms (overdraft and late fees) and indirect terms (eventual loss of checking account, criminal charges, utility shutoff).”