Zen Penny

Seeking the Path to Financial Nirvana

Taking The Fringe Out of Fringe Banking

with 3 comments

The payday loan industry has exploded in the last decade. According to a report by the Center for Responsible Lending, the industry now exceeds $28 billion a year. Of course, traditional brick and mortar banks are looking for a piece of that pie as well.

Wells Fargo offers a payday service called Direct Deposit Advance. They will “advance” you up to $500 and upon your next direct deposit, they will deduct the principle plus the fee of $2 for every $20 borrowed from your checking account. That’s a really nice way of saying this loan has an APR of 120%. Assuming a bank patron used this “service” bi-weekly for an entire year, it would cost them $1300 in fees. I don’t need to tell you what you could do with that money had you saved it and not spent it on fees.

The requirements to use Direct Deposit Advance are a little steeper than your typical strip mall check cashing joint, but not by much. To qualify, you must have a Wells checking account with a direct deposit $100 or more every 35 days and the account must be in good standing. If you meet these qualifications, it’s as easy as a mouse click or ATM visit away. Convenient and easy-to-use bank services are usually a big plus, but in this case, it makes it all too easy to fall into a payday loan trap.

In the end, Wells Fargo would much better serve themselves and the community at large by steering these folks toward bank products that encourage financial responsibility. Perhaps they could require that every customer who uses this service open a savings account and then refund some of that interest into the account, like the North Carolina Employee’s Credit Union did. At the very least, mandate that customers who want to use this service must attend some sort of orientation or counseling session at their local branch to go over the fine print and the pitfalls of payday loans.

The purpose of this post was not to single out Wells Fargo as the only major bank using this questionable lending tactic. I am sure there are many other banks out there that do this in one form or another. But I can speak from experience as I spent over $500 in fees last year towards this very service. Thankfully, I have finally broken myself of this destructive habit. 


Written by Zenpenny

April 3, 2007 at 6:15 pm

3 Responses

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  1. I wonder what would be the rate of delinquency and default in cases of loss of employment and loss of life. Do these payday loans also have right to set off from settlement claims?

    Thanks and regards

    Shashank Chowdhury

    April 4, 2007 at 11:58 pm

  2. Excellent question. After checking out the term and conditions, I am still unsure of the answer since it has no clause for loss of employment or death. But I will continue to update this post as I find out more.


    April 5, 2007 at 11:25 am

  3. Post melt down how are the payday loans doing?

    Shashank Chowdhury

    January 22, 2009 at 7:58 pm

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