Last year, wanting to have a water-well drilled on my farmland but unable to cover the entire expense, I opted to borrow. Several big-name banks were sending offers of zero percent interest if paid in full within 12 months, with small origination fees and minimum monthly payments. Knowing I had grazing fees coming, I availed myself of one of these.
Banks, of course, assume (hope?) that borrowers will be unable to pay off the loans by the due date, at which point interest kicks in at 24 percent APR (annual percentage rate). I repaid my loan in a timely manner.
What did it cost me to borrow $5,000 for 12 months? One hundred dollars.
Compare this to the cost of payday loans. These loans, too, are aggressively promoted. Regrettably, they target the most vulnerable segment of our society. In our state, payday-loan borrowers are charged $60 and more to borrow $100 for a mere two weeks.
The Wyoming Division of Banking has handed loan sharks license to steal. And steal the sharks do -- from people who are desperate and poor.
Here is what the Division allows under Wy. Stat. 40-14-362 et seq.
For a maximum loan term of one calendar month, the finance rate is specified as "the greater of 20 percent per month" (or $30).
In addition, the finance charge on a 14-day loan of $100 is $30.
In other words, to borrow $100 for two weeks, indigent working stiffs in Wyoming shell out $60 at the least; often, the fees add up to a great deal more. Try an APR of 780 percent: This is what Wyoming state law allows. Wyomingites end up with second, third, and fourth loans to cover previous ones. Payday loans are simple to obtain, yet they're almost impossible to get rid of. And you wonder why Wyoming has the highest suicide rate in the country?
More than 15 states have banned payday loans outright. Not to be outdone, the loan sharks evade these states' caps on interest rates by setting up online operations in states like "hospitable" Wyoming.
Worse, the same banks that offer interest-free loans for twelve months to the likes of yours truly -- JP Morgan, Chase, Bank of America, Wells Fargo -- are the behind-the-scenes allies of Internet-based payday thieves. It makes no difference to the banking giants that interest rates exceed 500 percent; they are the shadow helpers who make sure the thieves get to collect. In turn, banks pocket the overdraft fees when an account is delinquent, which it usually is. They even seize child-support payments.
Processing automatic withdrawals would seems an unlikely source of profits, but the banks know their customers are on shaky grounds financially; hence, withdrawals often set off cascades of overdraft fees, sometimes in the thousands of dollars. According to a report by the Pew Charitable Trusts, more than one-fourth of payday-loan borrowers acknowledge that the loans caused them to overdraw their accounts. Even big-name banks covet overdraft-fee incomes.