Sara Routhier, Director of Outreach and Managing Editor of Features, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overw...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Mar 8, 2012

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Consumer advocates are up in arms as the nation’s largest banks have begun to roll out new financing options that resemble payday loans. Wells Fargo, U.S. Bank, Guaranty Bank and Fifth Third Bank are amongst the top lending institutions that are now allowing short-term loans backed by a borrower’s checking account.

While the banks claim their short-term lending practices are not the same as those used by payday loan lenders, consumer groups feel otherwise.

The banks’ options grant borrowers with short term money that must be repaid in two to four weeks, and come at very high annual percentage rates (APRs). However, instead of borrowers writing the banks personal checks as collateral, the banks simply garnish the borrowers’ checking accounts and incoming paychecks.

Some advocates claim this bank account garnishment puts consumers in a position where they are forced to take out another bank-backed short-term loan to pay off other expenses, thus forcing them into the same “debt trap” that payday loans are criticized for.

“Payday loans erode the assets of bank customers and, rather than promote savings, make checking accounts unsafe for customers,” said a letter signed by 250 consumer groups, community and religious organizations and law centers, according to CNN Money. “They lead to uncollected debt, bank account closures, and greater numbers of unbanked Americans.”

Despite the large institutions’ claims that their short-term options aren’t the same as payday loans, the Center for Responsible Lending found the opportunities offered by the four above mentioned banks as being nearly identical to payday loans.

While consumer advocates are quick to criticize such lending options, an adequate fix has yet to be suggested. These short-term volatile forms of money are very heavily demanded and banks are simply meeting that demand.

As Richard Cordray, head of the Consumer Financial Protection Bureau, states, “When you’re desperate, the terms of the loan seem to matter a lot less. You need money. You need it now. Rightly or wrongly, people faced with tough situations often think these payday loans are their only options.”