We have written before about the periodic announcements by banks that they are now offering a small dollar loan product. We read of the latest in the Charlotte Observer, which ran a story about that city’s favorite son, Bank of America and its new payday loan product.
We wish Bank of America every success with this product, which is available only to its account holders. We understand that it is intended merely to give those BofA customers who use payday loans another option, and it is not generally available to customers of installment lenders who are unlikely to bank with BofA.
Usually, in commenting on these kinds of products, NILA would limit itself to the observations that we have seen similar initiatives come and go, that banks generally make a loss on their small dollar loans and that when it comes down to it, installment loans are still the most reliable, safe and affordable small dollar credit source available. But something in the Observer article caught our eye, so we are going to do something a little different this time, We are going to use it to point to the absurdity of using APR as a measure of the cost of a loan.
According to the article, the BofA loans are intended to be a “bridge” from “paycheck to paycheck” and will have a $500 limit, repaid in monthly installments over 90 days. The loan will cost only $5, regardless of size. If, however, that same loan, were for less than the maximum rate of $500, say $100, and was repaid in 60, rather than 90 days, it would fall foul of the regulator in North Carolina (and a number of other states), with an APR of 42 percent, in a state where the maximum is 30 percent
Yet the loan would still cost $5.
This is a pretty good deal if the alternative is overdraft fees which continue to build as the account holder scrambles to make an emergency deposit.
We see this as further proof that APR caps are inadequate for the regulation of small dollar loans.