One of the comments being heard from many bank customers over the past several months is that they’ve experienced a noticeable drop in the service they receive from their bank. The reason for this is somewhat understandable–banks are under a tremendous amount of pressure as more banks are failing essentially every week. You could argue that a time like this would call for improved customer service, but banks seem preoccupied to many of their most loyal customers.
There are several areas where banks are under a significant amount of pressure right now. Here are some of the issues facing banks:
- FDIC Is Running Out Of Money: With 95 bank failures in 2009, FDIC insurance has been called upon many times this year to cover the deposits of bank customers. The fund is not an unlimited pool of money though and it’s not accustomed to such a rapid succession of bank failures. To solve the problem, the FDIC wants banks to prepay fees for the next three years to build the fund back to $45 billion. The problem for banks is that this solution means coming up with three years worth of fees when they are already strapped for cash. The FDIC has the option to approach the Treasury for funds as well, but they are choosing to seek funds from member-banks first.
- Pressure to Make Loans: Even though the recession seems to be approaching its end, the credit crunch is ongoing from the standpoint that it’s difficult to get a loan. Banks have money now from TARP funds and from raising capital on their own, but they’re hoarding that cash more than they’re lending. Major banks are now being forced to report their loan portfolio activity, creating more pressure to make loans even if few qualified borrowers are seeking financing.
- Capital Strength: Approximately 500 banks received TARP money and of those banks, less than 50 have repaid the taxpayer loans. In addition, the stress test results forced several large banks to go to the capital markets and increase their cash on hand in case of continuing defaults. Add to this the fact that mortgage defaults and credit card defaults are still expected to increase for the foreseeable future and it’s easy to see why banks would rather sit on a mountain of cash than add liquidity to the credit markets.
- Public Perception: A factor that will take years to repair is the simple idea that the public feels that their money is safe in a bank and that the bank is concerned with more than just generating profits. There is disdain for banks that get to borrow money from the Fed at an interest rate of 0% and then turn around and charge credit card customers interest rates above 20%. Banks will need to work hard to regain the trust and loyalty of their customers.
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Despite Bad Press, Payday Loans Can Help
Payday loans rarely receive good press. Just look at the news in early January: The Iowa Catholic Conference made headlines when it urged its state legislators to cap interest rates on payday loans at 36 percent. At the same time, a new law in Washington State that took effect Jan. 1 limits the size of payday loans there to $700 or 30 percent of a person’s annual income, whichever is less. Kentucky’s governor, too, has called for a cap on the amount of interest that payday lenders can charge. But despite all this bad press, a large number of U.S. residents still rely on payday loans. A survey by the FDIC says that 18 percent of U.S. residents rely on means other than banks to meet their financial needs. Often these alternate means are payday loans. Yes, these loans can be dangerous. They can come with exorbitant interest rates. But if you ask the right questions, payday loans can serve as a valuable tool in difficult economic times.
A Booming Industry
People are struggling today. Unemployment at the beginning of 2010 was above 10 percent. Companies are asking their employees to take unpaid days off. It’s little surprise, then, that more people are turning to payday loans to make ends meet. These small loans help people pay their bills until their paychecks arrive. There are potential pitfalls with payday loans, though; these lenders often charge exorbitantly high interest rates. Others charge significant late fees. These are just two of the reasons why you have to do your research before taking out payday loans.
Get it in Writing
Before taking out a loan, ask your payday lender to spell out in writing exactly what the interest rate and fees are for the amount of money you are borrowing. Ask the lender, too, to write down the penalties that you’ll face if you don’t pay back your money on time. Before taking out a payday loan, you need to know exactly what kind of financial agreement you are making.
Don’t Become a Regular Customer
Many people who take out a payday loan return the following week to take out another. They do the same the week after. Before long, they’ve become a serial customer, taking out loan after loan. This isn’t the way payday lending is supposed to work; these loans are supposed to work as a once-in-a-while financial safety valve, a way to get through those weeks in which money is tight. If you become a serial customer of your local payday lender, you’ll end up paying far too much to borrow your money. You might want to work with a credit counselor to come up with better ways to meet your financial obligations.
