Recently, the FDIC launched a pilot program that is encouraging banks in the United States to throw their hats in the payday loan ring and see whether or not they can actually be competitive. An article in the Milwaukee Journal Sentinel profiles one bank that has taken the FDIC up on its offer. Located on Milwaukee’s south side, Mitchell Bank applied for the program and will soon be offering small cash advance loans to their customers.

It it certainly not a secret that payday loan and cash advance company fees are high…REALLY high. An example in the articles calculates the actual cost of your average payday loan as follows: “a payday customer borrowing $500 for two weeks at $22 per $100 would pay back $610 in all, giving the loan an annual percentage rate of almost 574%.” That’s a lot of money when you consider that most of the people taking out the loans are already struggling financially.

In response to this, the payday loan companies insist that the services that they offer are viable and important and while the rates are higher than those of traditional bank loans, they are certainly nothing to compare to the alternatives including credit card late fees, overdraft fees or worse.

Still, Mitchell Bank is creating its own payday loan program of sorts with a few noteworth distinctions:

1. Instead of having to pay the loan back in two weeks like most payday loan companies, the borrower has the option to repay in monthly installments over six months or more
2. The interest rates will be variable depending on the borrower’s credit worthiness
3. There will be an application fee of $12 to run a credit check on all applicants
4. Borrowers must have a direct deposit account with the bank
5. Borrowers must set aside 10% of the amount borrowed in a savings account with borrowers who have very low credit scores having to put 20% of the loan amount aside as a pledge against the loan

Even with all of these rules, the bottom line is still a lot more rosy looking that that of the typical cash advance loan. In the end, a person with a $500 loan will only wind up paying abou $87.88 per month or, in total, about $527. In this example, that puts the interest rate at just about 18.5%.

This lending program is an interesting notion and one that may very well catch on elsewhere in the country. As for the payday loan top brass, they, not surprisingly, don’t see much of a future in such a lending structure. Notwithstanding, they are more than willing to fight a good fight as they have grown accustomed to doing in recent years.

Read the full article at the JS Online.

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