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Bank Deposit Advances Are Awful Things

Frustrated woman puts a hand to her head as she reads a document.The Consumer Financial Protection Bureau has come out with a new report on the dangers and high costs of deposit advances.

As bad as payday loans are, deposit advances — also known as direct-deposit loans — might be even worse, according to the report.

If you have a checking account, payday loans probably aren’t an issue for you. But deposit advances are being peddled by the very place you put your money — your bank.

The loans are easy to get, but, just like payday loans, come with terribly high fees. Consumers who take one of these loans may not understand the penalties involved — or how easy it is to get caught in a revolving debt trap.

Among the banks offering the loans are some of the biggest in the country, including Wells Fargo, U.S. Bancorp, Regions Financial and Fifth Third.

The loans are available to customers who receive recurring electronic deposits, such as direct deposit of paychecks or Social Security payments.

When you request a deposit advance loan, the bank typically credits your account almost immediately. The advance is then repaid automatically the next time an electronic deposit is made to your account.

Chart showing average monthly direct deposit ammounts of borrowers and non-usersThe typical charge for a deposit advance is $2 for every $20 borrowed, or about $10 per $100 borrowed. That’s a little less than what payday lenders charge, which typically runs about $15 per $100 borrowed on average, the CFPB says, but still very expensive.

The median duration of a deposit advance is about 12 days, meaning that the implied APR on a typical direct deposit loan is an astronomical 304%.

However, as bad as that is, you can get into even more trouble if your future deposits aren’t enough to cover the amount you borrowed. Then the bank can hit you with fees for overdrawing your account or not having enough cash on hand, which typically run about $35 per occurrence.

“Some institutions market deposit advances as a way for consumers to avoid overdraft fees when they do not have sufficient funds in their accounts to cover transactions,” the CFPB says. “However, deposit advances are typically not offered as a form of ‘overdraft protection’ that would automatically cover nonsufficient funds items up to a consumer’s deposit advance limit.”

Chart showing average daily account balance of those who borrow

The CFPB found that people who use deposit advances are much more likely to get hit with overdraft fees than eligible nonusers.

Nearly two-thirds of consumers who use deposit advances get hit with overdraft or nonsufficient funds fees, the agency found, compared to just 14% of eligible nonusers.

What’s particularly dangerous about these loans is that it’s very easy to get caught on the treadmill of continually taking out new loans to cover loans coming due as the fees continue to pile up. The CFPB found that the more people borrow, the more likely they are to borrow even more and take out loans more frequently.

And it’s not like we’re talking about huge loans.

The median average advance was only $180, and the median average daily balance was $343, reflecting the fact that some consumers take out more than one advance prior to repayment.

Unless you simply can’t qualify for a credit card, it’s not clear why someone would use a deposit advance.

In contrast to the enormous fees banks charge for deposit advances, credit cards provide interest-free loans until your statement comes due. And if you can’t pay the full amount, most cards charge you an APR in the high teens, far less than on deposit advances.

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