An alternative to payday loans, but it’s still a high cost

“At the end of the day,” Ms. Borné said, “a bank that pays its depositors less than 3% interest should lend that money for much less” than an interest rate of 70% or more.

Here are some questions and answers about short-term loans:

What happens if I run out of funds to make a repayment on my “simple” loan?

Ms Heitman said if an automatic payment was overdrawn in a customer’s account, the bank would wait until the next scheduled payment date to make a withdrawal. In the meantime, the bank is using its “internal” collection processes, such as contacting the customer via text and email, to encourage the borrower to make the missed payment, she said. No late fees are charged. She declined to say whether the bank would refer overdue accounts to outside debt collectors at some point.

Are there other major banks offering similar loans?

Cincinnati-based Fifth Third Bank offers what it calls “early access” loans — essentially, a payday advance — up to $1,000 for customers who have had accounts at the bank for at least a year . The bank charges a fee of 3% of the advance, which must be repaid in full with the client’s next deposit. Partly because the loans aren’t repaid in installments, they don’t meet Pew’s criteria for “safe and affordable” small loans, Bourke said.

What are the alternatives to high cost small loans?

Some credit unions offer “borrow and pay” programs, in which a portion of customers’ payments go into a savings account that they can draw on after the loan is paid off. Ideally, consumers should try to amass a cushion of cash that they can use in an emergency, avoiding having to borrow at high cost, said George Barany, director of the America Saves program, an initiative of savings from the nonprofit Consumer Federation of America.

Consumers should set an achievable goal — say, $400 to $500 — and set aside a small amount from each paycheck until it’s reached, he said. It’s best, if possible, to have a fixed amount — even $25 — automatically deposited into your savings account. Some employers will split your paycheck between your checking and savings accounts if you ask. You can also ask your bank to set up an automatic transfer from your current account to your savings account each month.

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