Those fees work out to a much higher annualized interest rate than payday loans, the industry argues, and they face significantly less government regulation.

From a press release sent January 6:

Payday advances are highly regulated

• State laws heavily regulate all aspects of payday lending, including limiting the number of loan transactions, placing caps on loan transaction amounts and the fees that can be charged.  Payday loans are also subject to a number of federal laws that protect consumer credit borrowers, including full disclosure of the fees expressed both as a dollar amount and an annual percentage rate.
• Bank and credit union overdraft transactions have no such regulations.

Payday advances can be a less costly alternative to overdrawing a bank account

• Payday lenders typically charge a flat fee of $15 per $100 borrowed, or 391% if quoted as an annual percentage rate.
• FDIC reports that the average bank customer pays $27 (median overdraft fee) to cover a transaction of $36 (median transaction size), with annual percentage rates ranging from 1067% to 3520%.

A report (pdf) on banking practices prepared by the consulting firm Bretton Woods for the payday lending industry was released Friday, indicating that Iowans pay over $321 million annually in overdraft fees.  That works out to more than $300 per household in the Hawkeye state, which seems high, but it is below the national average.  The Bretton Woods report also claims that banks and credit unions employ strategies to maximize the overdraft fees they charge their customers by reordering debits and withdrawals.

Some quick research indicated that state governments probably don’t have the power to regulate bank overdraft fees — at least not those assessed by big, national banks — in the same ways that they can regulate payday loans, which further complicates things for the state legislature.

Back in August, intern (and now Truman and Mitchell scholar) Alec Schierenbeck examined all sides of the payday lending industry in Iowa, painting perhaps the fullest picture of the issue available locally. In light of news that key legislators plan to move forward on a cap on payday loan interest rates, I’d recommend giving the story another read.

A few facts about payday lending that are important to keep in mind:

• 400 percent interest is very, very high — perhaps beyond the point of what should be legal — but the payday lending industry claims that capping interest rates at 36 percent (as the legislators tentatively proposed) would end the practice of payday lending in Iowa altogether.
• Consumers who avail themselves of payday loans frequently may end up losing large amounts of money each year, but they often do not feel taken advantage of. At least one frequent recipient of the loans says they have saved her life.
• Supporters of a ban on payday lending (or a cap in interest rates, which would likely have the same effect) say that without the availability of high-interest loans, consumers who are in trouble will start asking family and friends for money instead. This, they argue, is how it used to be, and it is only the social stigma attached to asking friends for money that keeps payday lenders in business.

It’s a tremendously complicated issue, and while there are plenty of folks in the lending industry who are out to take advantage of those who are already struggling, there are compelling arguments to be made on both sides. I’d encourage you to read on for more.