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Big banks say they'll stop high interest short term loans

Some of the country’s largest banks have announced an end to a controversial lending practice known as deposit-advance loans. The deposit advance loans have been compared to payday loans, which are short-term, high interest loans often utilized by borrowers with poor credit or limited other options for securing extra funds. The deposit-advance loans have been criticized as predatory by consumer rights advocates, leading the banks to proactively stop offering them before federal regulatory pressures required it.

A study on these types of loans found that the average interest rate was about 365% APR, or $10 for every $100 borrowed. The loans come due quickly, usually about 10 days after the amount is borrowed. At that point, the bank will automatically deduct the amount due from the person’s checking account. This system has proved difficult for borrowers, who were stuck in a cycle of renewing and taking out new loans for about 175 days out of the year.

Borrowers who have been caught in this type of debt cycle often have a hard time getting out and becoming debt free. This is because banks and other short-term lending companies do not necessarily consider the ability that the borrower will have to pay back the amount of the loan, since the high interest rates and penalties are very profitable.

Borrowers who have been taken advantage of by these types of loans and who are struggling to get out of debt should know that there are various options that they have to fix the situation. One option in some circumstances is to declare bankruptcy and seek a discharge of the overwhelming debt.

Source: CNN, “Big banks to stop offering pay-like loans,” Blake Ellis, Jan. 21, 2014.

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