Sara Routhier, Managing Editor and Outreach Director, 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 overwhelming world o...

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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: Apr 17, 2012

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In light of Minnesota cracking down on payday loan lenders and driving their services out of the state, a recent report by Minnesotans for a Fair Economy (MFE) attacked U.S. Bank and Wells Fargo for operating through a loophole and still offering short term financing at interest rates of up to 365 percent.

Payday loans are a type of financing that is very easy to qualify for and offered over a very short term. All that’s required is a postdated check for the balance of the loan plus whatever fee is charged for the service. When a borrower’s payday comes about one or two weeks later, the payday lender cashes the borrower’s check in order to secure their payment.

For the convenience of the quick approval and loose qualifications, these lenders charge very high interest rates. Usually in the range of $15 per $100 lent, payday loans often carry annual percentage rates of 350 percent to upwards of 1000 percent.

The problem with payday loans, however, is the fact that they trap consumers in a vicious debt trap.

“Most customers can’t afford to repay the whole loan in just a few weeks,” said the MFE’s Predatory Payday Lending report. “And if the payday lender deposits their check, it will bounce, costing the customer even more in fees. So instead of incurring bounced-check fees, the customer agrees to renew the loan and just pays the interest, or takes out a new loan to pay off the old one, leading to a cycle of debt that can last for months or even years.”

That cycle of debt is not just consumer protection propaganda either. According to the report, only 15 percent of payday loan borrowers take out just one loan. Most are indebted in a cycle of short-term borrowing for over a year.

To combat what they saw as a volatile and predatory practice, Minnesota capped their state’s APR’s at 33 percent, plus a $25 servicing fee. For instance, on a $500 loan taken out for a 10 day term, Minnesota laws only permits lenders to charge a fee of $29.50, which is $25 plus $4.50 (33 percent of $500 over a 10 day period).

Wells Fargo, however, is currently getting away with charging $37.50 in fees and interest on an identical loan. U.S. Bank is charging an astounding $50.00, which is equivalent to an APR of 365 percent.

Since banks that are chartered nationally by the Office of the Comptroller of the Currency (OCC) are exempt from state laws, due to national bank pre-emption standards, U.S. Bank and Wells Fargo circumvent Minnesota’s usury laws.