By Candice Choi, AP Personal Finance Writer
NEW YORK (AP) — Payday loans may be coming to a bank near you.
They're marketed under a different name, but a handful of major banks already let customers borrow against their paychecks for a fee. And there are signs the option may soon become more widely available.
Banks say their loans are intended for emergencies and they are quick to distance themselves from the payday lending industry. But consumer advocates say these direct deposit loans — as banks prefer to call them — bear the same predatory trademarks as the payday loans commonly found in low-income neighborhoods.
Specifically: Fees that amount to triple-digit interest rates, short repayment periods and the potential to ensnare customers in a cycle of debt.
With a traditional payday loan, for example, a customer might pay $16 to borrow $100. If the loan is due in two weeks, that translates into an annual interest rate of 417 percent.
Since the borrowers who use payday loans are often struggling to get by, it's common for them to seek another loan by the time of their next paycheck. Critics say this creates a cycle where borrowers continually fork over fees to stay afloat.Banks say their direct deposit loans are different because they come with safeguards to prevent such overreliance.
Wells Fargo, for example, notes customers can only borrow up to half their direct deposit amount or $500, whichever is less.
Its fees are cheaper too, at $7.50 for every $100 borrowed — although that still amounts to a 261 percent annualized interest rate over the typical pay cycle. The amount of the advance and the fee are automatically deducted from the next direct deposit.
Wells Fargo admits that it's an expensive form of credit intended only for short term use. But customers can max out their loans continually for up to six months before they're cut off. Then after a one-month "cooling off" period, they can resume taking advances.
U.S. Bank, which has more than 3,000 branches mostly in the Midwest and West, and Fifth Third Bank, which operates 1,300 branches in the Midwest and South, offer loans with similar terms and restrictions.