Bank pushing 120% APR loans
This time, the nice lady at the counter asked me if I needed immediate access to the deposit? Huh? Said I. Looking at the payeee - "I think the check will clear..."120% APROh, it is not that, said she, it is just that some people need immediate access to their deposits, like same day, or tomorrow, and if you did we can expedite it.
Oh, that's nice, thought I, and said "no thanks, got enough balance to cover any outstanding transactions thanks, but been there..." so, I wandered off, and suddenly though - well was prompted by my better half to think - "expedited? at what price?"
So, I checked online - there is nothing about expedited access to deposits, rather a guarantee that deposits before 4pm are available same day... or next day. Unless: several reasons, none of which apply to me, nor, I sincerely hope, the payee.
But, there is "direct deposit advance". Interesting:
"The Finance Charge is a one-time transaction charge and is not dependent upon the length of time the advance is outstanding. The Finance Charge is $2.00 for every $20 that is advanced, which equates to an Annual Percentage Rate (APR) of 120%."
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As a dood who used to work in a bank:
It is in many places a law that charges and fees show up included in your APR for certain things. For instance, if you get slapped with some $35 charge on your credit card, it could show up as being akin to like a 150% APR for that monthly period instead of just a fee, even though it's obviously not interest, as is the case in the fee at issue in the post.
Also, much better sometimes to pay a $2 fee for a check to go through same-day rather than pay $35 for EVERY charge that goes through while you're waiting for a check to clear.
What the clerk was offering was like a mini overdraft protection service. I see no problem with it, frankly, as long as they're up front about you being charged.
was that "bank of the west"? sounds like one of their scams... personally I scrutinize every statement carefully... and if it does not jive I change banks... helps to have accounts with several banks too...
Flytch, given even minor scrutiny, nearly every bank will screw you as much as possible. There's no one good to change to. Although personally, I do like HSBC and have for a while. They'll still scam you occasionally, but not as bad as most, and they're quite good about fixing the occasional fee if you call em.
Dear "dood who used to work in a bank", it's a way of upselling and collecting fees and it's the way banks are trying to cash in (rimshot!) on the check cashing business.
I'm telling you, stuffing a mattress is looking better and better.
As awful as this may sound from the outset, I've actually found it to be pretty useful when I'm skating on thin ice, money-wise. If this is the same bank that I'm using (and it seems like it may be, as it's the exact same setup, but it might not be) the 20 or 30 bucks you might spend doing this is a hell of a lot cheaper than the seven or eight overdrafts that you might get. Why seven or eight instead of just one? Well, the funny thing is, the charges mysteriously take a while to go through when I'm getting down to the wire, so instead of the lightning-quick payment coming out of my account, it would wait until a large debit would eat up the balance and then plug away with the smaller ones. At 35 bucks a pop, overdrafts were simply untenable, and paying a bit to avoid them was well worth it.
Finding out later that by having a decent amount in a savings account, and having an even smaller $5 fee for automatically kicking money over from your savings (free if you've got the foresight to actually call or go online and do it manually) was a big BIG relief. Funny what banks don't tell you.
So the 120% APR is a bad solution, but it's much better than a terrible solution. (Though not as good as the decent solution that I fairly recently discovered.)
My bank IMMEDIATELY credits deposits. In fact, if I overdraw my account and go in the same day, I don't even pay a fee. Nor do I pay to talk to a representative or if a check is returned to me.
OTOH, I've heard that my bank is the last locally owned bank in the state.
Its the corporate behemoth scum like Citigroup, Bank of Amerika, etc that do this crap. Its mostly the same scum that are now demanding trillions of dollars be taken from the American people so that it can be lent back to them at interest... with plenty more fees.
Dump the Bankers off our Backs!
#4, the idea of the mattress was great if you were in 30's USA up to when they inflated into WW-II. We are taking the alternative path this time, weimar hyperinflation is the plan. Buy food shoes bicycles solar cells tools and rechargeable batteries. United Statsians seem to think guns will be valuable but there seem to be enough out there to glut the market. I could think of more but you get the idea.
Maybe I am being incredibly dense here, but I don't understand where the 120% figure is coming from.
How can you calculate an annual rate if the loan won't cost any more regardless of how long it is outstanding?
$2 on every $20 is a 10% flat fee. It says "is not dependent upon the length of time the advance is outstanding." So even a year later, it would still be 10%, right?
AlphaGirl @#8
If you're dense, it's no more so than I am (FWIW). I read the post, then scanned through the comments to see if anyone else found the 120% thing confusing. I'm now confused and bewildered that it took eight posts before you got to the nub for me.
I even followed the link to the Dynamics of Cats blog (posted on scienceblogs.com; hmm...) to RTFA, and it appears that the blooger claims the 120% APR claim is on the bank's site.
So now I really don't get it.
@#8, The 120% means that you pay back the whole thing, plus 20%, basically. The APR thing is a little bit misleading, as you've already got the income to pay off the bill pending. It's like a loan from the money that you've deposited, but hasn't shown up yet. The extra 20% is for the service. You generally don't think of it as a loan when you've gotta use it (even though that's technically what it is) but rather as a service.
At least, that's what it seems like to me.
I can't really see that as a 120% APR loan. It's more like a "getting your money early" penalty of 10%. You're not paying anything back like a regular loan, as you'd never received it in the first place.
I'm still not seeing that as 120%. If they "loan" you $100, you pay them back $110, right? $2 for every $20. That would be 110%, wouldn't it? Where is this extra 10% coming from?
I see it as a 10% service fee. That's a pretty rough fee, whatever you want to call it.
this is why im studying finance :D
Uh, this isn't a bad thing. The bank is offering to call your deposit cashed for 10%. I think that the fee might be a little more than I would want to pay, but I fail to see the evil nefarious banker voodoo going on.
It seems like a pretty simple and straight forward proposition. The bank forwards you the deposit before they actually get the money transferred. If for whatever reason the deposit doesn't go through, you are still responsible for paying the money. The charge for the service is 10% of the deposit.
Um, sounds like a nice service if you are about to overdraft or bounce a check. If you use this service when you don't need it, it isn't the bank being evil, it is you being epically stupid. Even an idiot should be able to figure out that "Deposit - 10%
I know the financial doom and all makes people pissy about bankers, but the truth is that the only thing worse than a banker is no bankers. One of the greatest impediments to growth and prosperity is a lack of access to banks and credit. Point your finger at a poor and struggling place in the world and you will find a lack of functional banks and plenty of loan sharks who collect over due bills with a gun and a knife. Point to a prosperous place in the world and you will find banks. The reason why micro loans in third world countries are such a big deal is because they let a little bit of capital flow in places where it normally doesn't, and the result is a fairly dramatic improvement in living.
I am not saying the securitized derivatives are awesome (ref:economic d00m), but banks as a general institution are absolutely essential and good. I find the rush to lynch bankers to be a disappointing mob mentality.
OMG massive math fail here. Calling failblog, calling failblog!
First, people, this is a one time fee of 10%. It's not anything APR.
Second, OMG, people trying to explain 120% APR you make me weep. If you pay back the full amount of your loan, plus 20%, that is not "120% APR." Argh. You always pay back your principle on a loan! It's just 20%. To be an "APR" the loan needs to be amortized over a period of years. Usually the interest is calculated monthly.
The fee is egregious and abusive, I agree.
Catherine Shaffer
There are banks that don't give you access to deposits right away? I have overdraft protection, but on those (sadly, not rare enough) occasions where I'm at the bottom of it and make a deposit of any sort, I can use that money right away. Even an ATM deposit.
I can understand holding a US$ cheque to clear (I'm in Canada, if the spelling doesn't give it away already). Is it just that that I'm a customer of long standing, or is it a Canada/US thing, do you suppose?
Then again, maybe that's what my $13/month service fee is for...
Calling this 120% APR is insane. It's a flat fee. Sheesh.
I guess this is why the banks have gone after the payday loan companies so vociferously -- because they had there own scheme up their sleeves, and with payday loans companies out of the way, people would have no other place to turn.
I'm not saying that payday loan companies are angels, but neither are the banks, and these kinds of shenanigans proves it.
Furthermore, at every turn, banks have supported legislation that speeds up the process at which our funds are debited, but the speed at which deposits are credited and funds made available, never seems to change much, and as shown in the comments above, varies widely from bank to bank.
I agree with many of the above: this post makes no sense.
That is, a "one-time transaction charge" does not have an APR.
The 120% APR /is/ bad - if you are in a situation where you need access to your deposit /immediately/ - in other words, you must make payments immediately to avoid late fees that you know you will not be able to afford in the future - then the next pay cycle, you will be overwhelmingly likely to need immediate access to your deposit /yet again/.
It creates a vicious cycle where the people least able to pay fees are forced to choose between which fees to pay, while those for whom the fees are tractable are - without a doubt - not in a situation to pay fees.
Credit Unions. Usury Laws. Accounting Principles enforced by government regulation. Above all, societal backlash against banks making /predatory loans/.
You could call it an APR I guess, but I don't understand how that makes this a bad thing. The same thing basically happens every time I go to the ATM (provided it's not owned by my bank). There's a $2 charge for every $20 I withdraw. It's no big deal.
How about considering what the APR rate would be
for their other 'loan', 'overdraft protection'..
Either your deposit hasn't cleared yet, or you put
money in later, so you're stuck with the charge..
.01 cent over with a $30 OD fee= 3000%* 'loan'!
-some banks, though, will allow 1-2 'forgives' a year
and erase the fee if you ask nicely or show how a deposit was in place..
*Either that's right or I work in banking.
Daneyul: The banks are depending on you to think in precisely the fashion you are thinking: "It's not APR. It's a flat fee."
It's sometimes called The Percentage Fallacy. It lets scammers and con-artists live well while honest people struggle. Fifty dollars is fifty dollars is fifty dollars, whether you're making a one-time purchase of a $300 or $350 iPod or a one-time purchase of a $1500 or $1550 widescreen TV. Same difference - one way of stating it just makes it seem more palatable.
The bank is making - however short-term and secured it might be - a loan, (Money lent with promise to be repaid at a future time with interest charged) and the terms of the loan are stated as 120% APR by the bank itself.
That figure is /not/ third-party analysis. It's not conjecture. It's not hand-waving. It is cold, hard, legal fact that the bank is required to disclose.
In the UK (and possibly the US) there us a statutory mechanism for calculating the APR which must be applied. It may appear to produce an anomalous result with a one time fee, but this is a feature - not a bug - precisely to prevent banks from offering a £10,000 loan at 1% APR + a £3,000 administration fee.
If you think 120% is bad - try this one:
http://www.paydayuk.co.uk/
Typical 1737% APR!
This isn't illegal. The government repeatedly rejects calls to implement a ceiling, saying that the market will decide what interest rate is appropriate to reflect the risk in question.
It just legislates to ensure that (1) the APR is calculated in a consistent way, and (2) that the APR is prominently displayed to any potential bottower.
Banks aren't making money on mortage loans anymore, they must make it on user fees.
I like how a bank of america teller told me that he could not cash my payroll check written on their bank unless I opened a account with them first. I got a little tight but I ask that if they couldn't cash it that he mark the check as no good so I could give it to the DA. whereupon after a little hem hawing they finally cashed it.
Correct me if I am wrong,
but this sounds like Wells Fargo. The post is a bit unclear, as Wells Fargo Direct Deposit Advance is a loan. You get to borrow $20, and repay $22 automatically deducted from your next direct deposit or after some period of time (over 30 days I believe). This is basically a payday loan. I have used this service when money was tight, and I only got payed monthly. I must say that WF seems to do this pretty responsibly. They won't let you borrow too much, and if you use the service concurrently they slowly ween down the amount of money they let you advance. I'm sure there's some selfishness involved, but it does keep you from falling into the dreaded cycle of one payday loan to the next, without completely cutting you off from the advance you might need to make rent, or buy food and gas. I'm sure they make some cash on this, but it's a steal compared to dealing with a payday loan from the scum-of-the-earth check cashing stores.
"There's a $2 charge for every $20 I withdraw. It's no big deal."
Yikes!
ATMs in the UK are free for all major banks, you occasionally get charged for a private ATM (in a shop or something), but to say thats not a big deal.. you're getting fleeced. I bet you pay for incoming calls on your cellphone too.. :(
Can someone please explain why this is 120% and not 110%?
This is a flat fee. It's high, but it's not the end of the earth -- it won't get you caught in the vicious cycle of debt that actual high APRs do.
If you want to see bad, read the recent Harper's article on Pay Day loans / Cash Advance / whatever they're called -- those evil, evil loans that just "carry you through" to your next pay day. People almost always think that they will just be for one month -- that they are just hitting a rough spot and need an advance. Once they are caught in the cycle, however, they typically have to keep taking out pay day loans every month just to pay the interest: the structure of the loans makes this nice and easy for you.
For years, bank administrators have been under substantial pressure from their boards to increase so-called non-interest revenue. Traditionally, we think of a bank as an institution that pays depositors one interest rate and then uses those funds to loan out money at a higher interest rate. The differences in rates in justified by the difference in default risk between a bank customer and a bank. The difference in interest was also, essentially, the bank's gross profit.
Starting a few decades ago, management consultants and their ilk began to notice that net interest revenue was unpredictable. Worse, it's essentially a commodity and so it was hard to make a lot of money because you had one competitor driving down loan interest and another driving up deposit interest. The result was the push for new revenue streams that were independent of any loans. Banks began to think of themselves as financial service centers.
All of this was facilitated by the advent of large computing systems that handled all of the banks accounts. These programs allowed for automated ways to account for tiny micro-transactions which would have been to cumbersome and expensive to keep tracks of if it was done by a guy in a green visor. These days, you can go to bank software companies and they'll tell you about all the cool fees their programs can handle.
The other thing that really helped banks redefine their role with depositors was the increase in the importance of interbank lending. Depositors used to be the lifeblood of a bank since without deposits, the bank could not make loans. In the last few decades there has been a massive shift in the source of capital. Banks now simply borrow from each other at extraordinarily low rates and so the feel far less pressure to keep depositors happy.
Of course, none of this happens without the approval of the market. When some bank introduces a new fee, people can either move their account and make the bank suffer or they can tacitly say they think that fee is OK. We all know what happens every single time.
It's amusing to me that people are justifying the $2 advance by comparing it to overdraft and ATM fees. I can imagine a proto-BoingBoing blogging about those fees in the 70's and people having this same kind of argument. These days most people just accept them as a part of life. Wanna guess what your children are going to think of this?
The most egregious case of bank fees I ever came across was when a bank tried to charge me to cash a check drawn from one of their own accounts. I pointed out that there was no default risk since they could simply check the account balance and that their customer was essentially the guarantor of funds. They refused. Needless to say, that client went on a cash only basis from then on.
"One of the greatest impediments to growth and prosperity is a lack of access to banks and credit. Point your finger at a poor and struggling place in the world and you will find a lack of functional banks and plenty of loan sharks who collect over due bills with a gun and a knife. Point to a prosperous place in the world and you will find banks."
Correlation or causation?
I can just as easily, and more clearly, argue that a couple (that's two people) who both work $25000/year jobs can, within five years, afford a $100000 home, pure cash, while spending $10000 per year (one fifth their annual income) to rent a two-bedroom apartment.
Once they have the home owned outright, they then may spend merely $5000 per year in taxes and upkeep of the property (one-tenth their income). They won't eat out at restaurants for five years, but neither will they be spending that time working to pay a lender a profit.
They will use bicycles, scooters, small used cars or public transport, rather than expensive cars.
Or, their parents will gift them a vehicle. Their parents may gift them a place to stay rent-free for five years. Or their parents may gift them a place to live, and they then gift to /their/ children a place to live. Or, incredibly, their extended family - that group we term "society" - finds a way to house and feed everyone rather than enable a particular financial sector's massive profits for a few hundred and massive failures for billions of people.
It is not that access to money-lending enables growth and prosperity for individual people in the first world - it is that access to money-lending enables employed, professional people in the first-world to rent a "lifestyle" - often more-or-less perpetually - rather than own it, in order to make themselves seem to be of a high social status - equating spending money with being important, conflating a thirty-year mortgage on a house that will fall apart in twenty years with value.
Debt is crippling for individuals and families. It's crippled millions of lives, it's imploded our financial system and threatened to collapse the entire economy of the world.
Interest belongs in the business world, where well-characterised business risks and joint ventures exist, where clear and open accounting principles are used and enforced, where interest rates are often little more than 5%. Charging 120% interest - for /any/ reason - is evil and unjustifiable.
Transaction Fee != Interest Rate
My bank has done this for at least five years now, and since they charge the exact same fee- is probably the one in question. Frankly- it's saved my ass on more than a few occasions, especially considering their $35/item overdraft charges.
It's essentially just a payday loan, without using a seedy payday loan establishment (and paying much higher fees for the pleasure).
Most banks will hold deposits for at least a day or two unless you have a "preferred" account with them, so it's nice to get access to your money a few days early for a fee if you need it.
SAMSAM: This is /an actual high APR/. That's why the bank, in their own description for the service, must term it a %120 APR loan. It's a tiny amount that /you/ repay, but they may be doing this to thousands of people, and the collective cost to society when hundreds, thousands, tens of thousands, hundreds of thousands of people are charged %120 APR on hundreds of thousands of small loans is incredible and staggering.
Just because you only see one locust doesn't mean there's only one locust - locusts travel in swarms, and they will eat your crops, your neighbors' crops, their neighbors' crops, and eventually some people starve.
"It's just a cute mouse" doesn't change the fact that the mouse's extended family is eating and peeing on the grain in every silo and mill in the state.
So, the solution to this "abusive" fee is, what? Pass a law limiting the effective APR to something "reasonable," say 20% or so? By my calculations that's about 4 cents on a $20 check, assuming it would otherwise have taken 4 days for the check to clear. The practical result would be that the service would disappear because it wouldn't be worth it for the bank to collect the fee, and they're not going to do it for free. Boing Boing Blowhards are happy because they got to stick it to the "evil" banks. The poor schlub who was hoping to avoid the twenty or thirty bucks in bounced check fees, not so much.
Yes, It is a bad thing to provide customers with choice. I forgot we are all just small children that can't take handle the responsibility of our own decisions. Please somebody save me from myself.
You have to make some guesses to see the 120%. There is a maximum length on the loan of one month. You pay 10% to borrow the money for a maximum of one month. That means it is 120% APR, or Annual Percentage Rate, i.e. 10% x 12.
See, that's not so hard.
I'm a CPA.
The charge of 10% covers having funds availibility days earlier than you otherwise would. The number of days that the bank can wait before making your funds available is regulated by the Feds. Back when I used to be involved in this sort of thing, the maximum normal float time was 3 days. I'll give the bank the benefit of the doubt and I'll use 5 days as the number of days you "gain" for paying 10%.
10% x (365 / 5) = 730%
RPL: The "poor schlub" who was hoping to avoid the twenty or thirty bucks in bounced checque fees has several other options:
1: Keep good ledgers, in order to know what he has and what he does not have; Every high-school education in America - which are available for free, mind you - comes with a three-month-long class teaching anyone who cares to pay attention exactly how to do this. There's also Wikipedia that can be referenced and there's even widely available software /for free/ for major platforms that will do the journalling and ledgering automagically and prepare your federal tax return statements besides.
2: Carry a buffer balance - $50, $100, $150 dollars that he/she/they never ever touch that absorbs the occasional over-expenditure, replaced strictly when used. I personally operate with $60 that I never touch - I imagine that $60 is $0 as far as my bank balance goes.
3: Open a savings account with an overdraft protection option, so that the money comes out of the savings account. I think that, unless someone has a substantial amount to put into savings, a savings account merely for overdraft protection is kind of silly.
The practical result is that individual/family banking stops being a massive profit center and becomes a commoditised service.
It only takes a short amount of time to step up out of the situation where a usurious APR seems acceptable and into the situation where /what you earn is yours/.
The current PotUS has, several times, reminded people that recovery from the economic situation we are in will require sacrifice from just about everyone.
I say we sacrifice predatory lending practices by helping /every single person/ get one, then two, then three steps away from being tempted by the lure of easy access to a vampiric interest rate.
The monthly P&I payment on a $100,000 loan for 30 years at 6-1/8% (what I got when I bought my own home, YMMV) is $607.61, or roughly $7300 per year. Of that, roughly $6100 is interest (in the first year--it gets lower in subsequent years); the rest is principal. There are some subtleties: taxes and maintenance push the cost higher; tax deductability for the interest pushes it lower, and in reality you would have to come up with some sort of down payment (perhaps those generous relatives you postulate could help out). On balance, however, it's clear that your hypothetical couple would be better to pay a lender $6100 a year in profit than to pay a landlord $10,000 a year in profit and expenses. If the interest in the out years really bothered them, they could save the same amount (more, actually, as their monthly payment is lower) per year and prepay the loan after 5 years.
More generally, there is plenty of scholarship showing that stable credit markets are beneficial to people at large (i.e., the problem isn't just that you picked bad numbers for your example), if you were only interested in looking it up.
Posting from another Canadian who's very confused that the bank isn't crediting you any part of your deposit immediately, for free. If I deposit at an ATM, I get 500$ credit immediately, and the rest within 3 business days. If I deposit at a teller, I don't pay a fee, and I get all of it credited immediately.
No fee. No interest. Nuffin.
My government keeps crowing about how I'm sitting in apparently the last country on the planet with an independent banking system.
I wonder if these two things are linked?
so if you have a $100 check and deposit it and the bank decides to credit your account IMMEDIATELY, does that mean they just charged you a 100% APR on that "loan"?
That means that after a year I will have paid $100 to get access to my $100 deposit?
someone's math is off.
Bardfin,
If the poor schlub actually had those options he would use them, and we wouldn't need to outlaw anything. People who are using the expedited check cashing presumably can't carry a buffer balance, can't float their expenses on credit cards, and don't have much in their savings accounts. For those people, a $2 fee is better than the alternative; if it weren't, then they wouldn't be paying it.
To #34, #37, etc.:
This is an ADVANCE. I'm paid by direct deposit every two weeks, and if I'm short on money on the off week then I can request money in increments of $20, for a $2 fee per $20 collected at the time of the next direct deposit.
Say I have $15 in my checking account and I need to buy groceries or gas. I can get $60 instantly, putting my checking account up to $75 that day. I spend $50 on groceries and gas, taking my checking account down to $25.
The next Friday, when I'm paid by direct deposit (say $200), my checking account goes up to $225. And then $66 is deducted, taking it down to $165.
It's based on the promise of another direct deposit coming, not based on a check or anything else I've already deposited and am waiting to clear.
Excuse me -- $165 should read $159.
RPL:
"6-1/8% (what I got when I bought my own home, YMMV)"
That's fine for you.
Most people don't get 6 1/8 percent. Most people in the past decade are lucky to get a 9% loan, and many people weren't able to even /get/ a loan.
Right now, almost /no one/ can get a loan - because malfeasance in the financial sector collapsed the credit market.
"it's clear that your hypothetical couple would be better to pay a lender $6100 a year in profit than to pay a landlord $10,000 a year in profit and expenses."
Really? It's better that I pay someone $6000 (or, in a more realistic case, $9000 and sometimes as much as $13000-$15000 (ARM products)) for absolutely no return value (no work, no new product, no maintenance of existing product) than to pay the salaries of people who build and maintain an actual real thing - a home or apartment - that will continue to be useful after I am finished with it?
One of these financial downstreams I can touch, and see where the money I pay out is used - it has a clear and present return with value. I know, reasonably, that it is being used for living expenses and raising families and a quality of life, and a legacy that will be used by people coming after me. One of these goes off into someone's pocket and gets used for - what, precisely? Buffets? Hotel Rooms? Vacations? Conventions? Prostitutes? Third Homes? War? To be lent to someone else at %120, committing them to economic serfdom?
Wait! I remember now where all the money that went into the home loan market went to! It went into the pockets of people who spent it on vacations and third homes and partying while they "hedged" their risks.
forty. five. percent. of. the. world's. wealth. is gone. vanished. poof. Hundreds of thousands of people's homes and saved earnings are gone.
The real cost of doing business with a lender to get a home, for those who are now suffering massive losses and homelessness, isn't $6000, isn't $13000 or $15000. In many cases it's $80000+, $100000 in forfeited payments /and/ their homes /and/ the other $40000 they had in investments that turned out to disappear because they were all hedged with credit default swap derivatives. The real cost of doing business with a lender to buy a home is having to be told "You're fine so long as the music doesn't stop" - guess what? The music stopped, and there's only so many chairs, and many of those chairs belong to the guy who told you "You're fine so long as the music doesn't stop", and those chairs sure have a lot of gilding, jewelling, and soft padded cushions. Turns out you never really had a chair, just a mat to kneel on.
AIG and the major financial corporations have said "Let them eat cake!".
nearly every bank will screw you as much as possible. There's no one good to change to.
I use a credit union. I opened those accounts a long time ago and hardly ever used them. After a while I wanted to use some funds in it that were just sitting there. I made a huge screw-up and misread my statement, thinking the amount in savings was the amount in checking, when actually checking had a lot less. Much financial chaos ensued. The bank let me off with a single overdraft payment when they could have hit me with several.
I've since transferred most of my financial business to them.
When I want to talk to a knowledgeable, helpful human, I ring them up and a human answers.
(NCUA coverage recently verified.)
That is simply untrue, on every level. National average rates on the 30-year fixed haven't been above 7% since early 2002:
http://mortgage-x.com/general/historical_rates.asp
It is also untrue that right now you can't get a mortgage loan. Call your credit union and tell them you'd like to apply. You'll find out that it is quite possible to get a mortgage loan, although they will probably be a bit backlogged because business has been brisk. You should also find 30-year fixed rates in the low 5% range. Again, I speak from recent experience; where are you getting your information?
Now, it is true that you probably can't get a "stated income" loan anymore, but those loans should never have been made in the first place. Good riddance to them.
This is what is known as cutting off your nose to spite your face. If you can pay one guy $6000 to have a place to live and another guy $10000, then why do you care that one of them works in a "bank" and the other works in a "real estate management company" (both of them do about the same level of 'work' for a living, by the way; to wit, they sit in an office and shuffle papers)? Moreover, where do you think the real estate company got the money to build those apartments? That's right; they borrowed them from a bank. Think some of your $10,000 per year payments might be going to that bank? I do. Do you think that apartment would exist or would be as inexpensive to rent if there were no credit market to support it? I don't.By the way, an ARM is normally at a lower rate than a fixed (see the data at the URL above) because it represents a lower risk for the bank. You have a lot to learn about how finance and lending actually work, I think.
Do you honestly think that a real estate management company spends its profits (and most of the time they are quite profitable) all that differently than a bank does? How, precisely, do you know this?You know, there's a reason banks credit the largest payment first. It's not to screw you over on fees -- it's so you don't miss a mortgage/rent/car payment. The assumption is that large payments are the most important ones and the most likely to be immediately reported and adversely affect your credit rating.
This 120% thing is nonsense. They're taking on the risk that your deposit won't bounce or be fraudulent for a 10% fee. It's a voluntary service they don't *have* to offer and you *don't* have to take.
It's just another example of fleecing the poor, there's all sorts of businesses that do this, I guess the bank decided to get in on the action. The whole idea of loaning money with interest is inherently shady, where is the line at which the interest rate becomes morally reprehensible?
"an ARM is normally at a lower rate than a fixed"
"You have a lot to learn about how finance and lending actually work, I think."
No, I have read many, many ARM contracts. They all say the same thing, effectively: The lender can, for reasons entirely out of the control of the debtor, increase the rate (up to a given amount) to allow the lender to demand more money out of the debtor, which is "fine until the music stops". They're not a lower rate because they represent a lower risk for the lender - they're a lower rate /initially/ to allow the lender entry into a market which they have not been able to previously exploit, to increase volume because fixed-rate mortgages became a commodity - no growth, no new investment, no new market to get profit from.
"Do you honestly think that a real estate management company spends its profits (and most of the time they are quite profitable) all that differently than a bank does? How, precisely, do you know this?"
I read and pay attention to the news. I read and pay attention to the law. I can do simple math. I know how many units my apartment complex has (duh), how much they charge for each model of each unit (advertised), how much they pay in real estate taxes (public records), how much they spend in maintenance each year (supplies and labour), how much they pay the staff (a bit above market rates for professionals in this market) and I know each of the staff including the maintenance engineers, and most of the staff live in the apartments. It's called a community.
How do I know what a bank would have done with the money I paid on a home loan? Simple: I read and pay attention to the news. Hey, guess what? Someone's getting not just what would have been my money as a bonus, but the money I paid in taxes to my government as a bonus too. Right now, FIFTY THOUSAND JOHN DOE UNITED STATES CITIZENS are under indictment for squirrelling undeclared income away in UBS accounts in switzerland, and many executives of UBS are under indictment too for refusing to cooperate with the investigation. Buffets! Parties! Pools! Drugs! and hey, there's a guy who rides the bus with me every day, who has no toilet, shower, sink, wardrobe, bed or toothbrush. Guess why?
Narual: To be precise, it's a voluntary service that - until recently - state laws said that they absolutely could not offer, because the profit from it is obscene and allows them to unfairly exploit the fact that /they/ have control over a system and /you/ do not.
RPL: I like credit unions; They are, by definition, owned and controlled by the stakeholders. They're not banks. If my credit union is offering me a 5% rate on a thirty-year mortgage, it is because they are trying to keep generating new business in order to stay in business. You may have noticed that recently many people stopped spending.
I'm still not giving them the five percent.
Why? Here's why: 1/3rd, half my credit union gets laid off. No more deposits. No more balances to hold on float to lend on credit to draw down interest to accounts receivable. My credit union - which holds the note on my home - goes under or gets bought by a bank, which is in another state and uses some legal provision to repossess (I'm one day late on payment and they accelerate, or they screw up and don't process my payment on time, and then I have to hire a lawyer to fight a giant corporate entity with deep pockets). Or the contract gets lost in transition, and I have to hire a lawyer to work out at the end of the term the fact that, regardless of how they lost track of their paperwork and funding, I did my due diligence in good faith and so own the home free and clear. Or, hey - the bank I'm now making payments to is offering %120 APR loans and ARMs to people without the ability to continue them in a downtick - or whatever flavour of short-term profitable, long-term toxic financial instrument someone comes up with next - and suddenly I'm supporting social inequity. Hey, I could /just refinance/ someplace else, right? With attendant research, and hoping there's a local credit union that will give me favorable terms, it still doesn't absolve me - I just paid off the crooks (they break even or likely profit!) and am now paying /more/ to have peace of mind.
Or I could just own the home outright. And then I can use my own money, saved, to buy another home - and give that to my kids. They can then have a far better quality of life, maybe only have to have one earner in the family instead of two to meet a mortgage.
I have this idea, that America is the land of the free, rather than the land of indentured servitude and serfdom to financial aristocracy who can claim "too big to fail". Well, it is time for a revolution, a revolution that chokes the aristocracy out.
I will take the first step to keep money (a proxy for my effort) - and therefore power - out of the hands of those who, clearly and willingly, violated the trust of all good men, of uberrimae fides.
Switch to a credit union, tomorrow. Seriously. You'll start saving tons on fees and they're much more responsive and service-oriented.
Bardfinn,
A lot of your understanding of how finance and real estate work seems only loosely connected to reality, in some cases to the point of bordering on urban legend. Nevertheless, one of the wonderful things about this country is that there is absolutely nothing preventing you from living the way you describe. I personally don't think you are doing yourself or anyone else any favors by so doing, but that's just one man's opinion. I wish you the best of luck.
It sounds like they are required to report APR, and they have to use a certain calculation, which is causing the 120% APR, even though it's one time and not really valid. Here's the description of what they're reporting as APR (Pulled from Wells Fargo's site):
The Annual Percentage Rage (APR) is calcluated in accordance with federal regulations for an open-end line of credit. For example, a $40 advance would cost $4 in Finance Charge, and the APR is calculated by dividing the total Finance Charge for the billing cycle by the amount of the advance ($4.00/$40.00 =0.1) and multiplying the quotient by the number of billing cycles in a year (0.1 X 12 monthly billing cycles) = 120%
False Alarm...
this is what is generally known as a "vig".
i say unto this institution in the immortal words of morrie kessler:
"f*ck 'em in the ear! f*ck 'em in the other ear!"
I'm not sure that credit unions will front you money from a check without a fee.
As has been mentioned, by federal law banks cannot make money from checks immediately available from that check; it's an Anti-Money Laundering thing. It's a huge deal, actually, inside the bank.
Thus, people call and complain ALL THE TIME that the check they deposited took 3 days to clear, and why do they have an "available balance" different from their "usable balance." Well, one is what you will have when the checks clear. Not your money until the check clears.
I see NO problem with the bank charging you a fee because you didn't have money in your checking account to cover all your checks. Be better with your money, no problem. This will save you from bouncing a check when necessary for a relatively small fee, $2 compared to the $15 to $35 charged for overdraft, not to mention the charge your utility/landlord charges you for a bounced check.
I like how offering a service for a fully disclosed and simple fee is somehow evil in the minds of some of you people. Every transaction is "exploitation!" The supermarket exploited my need to eat by not giving me free food! They should be shut down! Then I can finally... er, wait a minute...
The fact is that people are using this service because they don't have a better alternative. Without it, they would be worse off. If banks couldn't charge for it, they wouldn't bother, and that doesn't make them evil. They're not obligated to assume the risk of giving you an interest free loan, anymore than the supermarket is obligated to give me free food. Think the fee is too high? Maybe it is, but I doubt it. Lending money to someone who apparently can't consistently maintain even a modest balance is, I imagine, a large risk, meaning if they charged only a small fee they'd be losing money overall, they'd cancel the service, and the customers would be worse off. And again, if you think the fee is too high, why not offer to lend people interest free advances on their paychecks yourself? Oh, you think you'll end up never getting a lot of it back? Interesting...
Five: It is indeed a vig, vigoroso - Sicilian for "vigorous", or an usurious interest rate.
Contra il Pizzo.
Moriarty: "because they don't have a better alternative. "
And they don't have a better alternative because - due to charging what the market will allow - all lenders charge ridiculously high fees. They would have a better alternative, if there were regulation of the market so that lenders - the entities with the money and the power - weren't allowed to abuse their control of it.
Even an 8% APR on what is, essentially, a very-short-term very-low-risk (you're not the risk, the bank underwriting the paychecque and the employer writing the paychecque are the risks) secured loan (they have a promissory note from /another registered banking institution/) is a ridiculously high interest rate - banks don't charge each other anywhere /close/ to 8% APR, and they /already/ get to charge you a fee if the check doesn't clear and they get to charge a fee to the writing entity if it doesn't clear.
RPL: Uh, /have you been reading the news/? we're approaching ten percent unemployment and the foreclosure rate has skyrocketed, banks failing left and right and having to be bought up or bailed out. I only WISH that the fallout from the systemic economic malfeasance of the past decade was merely an urban legend.
I hate the bullshit of "no government regulation free market" 'libertarians'. Government is itself a contract, one that advantages someone besides the 'libertarian'. God Forbid you and your cadre of regional power brokers not be allowed to nickel and dime all excess-to-survival resources out of a population in any manner not explicitly proscribed.
"The legal department says your plan is illegal."
"Ask them again - maybe they'll change their minds."
Checks? Non real-time account balance? Physically entering a bank building to make a simple transfer? How delightfully absurd.
I suppose it is expensive for American banks to hire extra riders and rest horses to quickly deliver money transfer orders between monasteries.
Alright, Cory, it was cute the first time. But, if these shenanigans continue, we may need to consider removing your blink tag button.
@ Bardfinn:
I'd like to echo what RPL said: this is completely untrue.
Mortgage rates are the lowest they've been in years. I'm looking to get a mortgage soon and have been preapproved with several companies for under 6%. Many of the people in my office have recently refinanced to get rates below 5%.
But don't take it from me:
http://tinyurl.com/cjw9f7 - "So far, so good: Bespoke Investment Group pointed out that the average 30-year mortgage rate fell below 5 per cent as of last Friday, to 4.93 per cent, its lowest level since 2003."
http://tinyurl.com/dkfoqs - "The mortgage finance company Freddie Mac said Thursday that average rates on 30-year fixed-rate mortgages dropped to 4.85 percent this week, from 4.98 percent last week. It was the lowest in the history of Freddie Mac’s survey, which dates back to 1971, and was down a full percentage point from a year ago. ... Mortgage applications surged last week. ... Nearly 80 percent of applications came from borrowers seeking to refinance home loans at lower rates."
... and there was a recent Times article (which I can't find now) saying that the biggest problem (for banks) is that they can't find enough people to take the loans. They are cutting the rates as much as possible, but that people are (naturally) hesitant to get into debt. The banks can hardly give these mortgages away.
From the Fine Article:
Uhm, no.
It's a one-time 10 percent fee - it has no term, and it is not a recurring cost, so I'm not quite sure how you can calculate an APR? It's an OPR (one-time Percentage Rate).
It's probably a bank in California. They don't call it the Golden (digger) state for nothing.
I had a free checking account with WellzFarg0 in Arizona. When I moved to Orange County, after less than a year they switched my account to the "closest equivalent" available in California, an account requiring a minimum balance of $500, and charging a monthly fee otherwise.
It may not seem like much to many people, but I was living in Santa Ana, an area where most of the people I knew and dealt with on a regular basis made that much money in a month working at WalMart or McDonalds!
This area (and neighbouring Anaheim) is the home of actual shoppes like Checks Cashed, Houses for Cash, and Cash 4 Autos (to name a few). All of which charged steep fees and interest rates not that far away from 120% APR.
Many of my friends and acquaintances couldn't afford the minimum balance or monthly fees to even open a bank account, so they were dependent on these businesses who fleeced them shamelessly and lead them quickly into a cycle of debt dependency.
The entire consumer credit industry is screaming for regulation every bit as much as the crooks on Wall Street. So far as I've seen, the industry does nearly as much damage to LA families and neighborhoods as alcohol and certain drugs.
#44 is getting closer to a larger issue. Consider a person who lives on a fixed income (SSI) who already has to ask for relative's help to even make rent and buy groceries. Let's say that person is short on some bill and gets a direct deposit advance. That's checking account $0, with a direct deposit coming in a few days, and the person gets a loan of $100. Long story short - this person continues to be in the hole and keeps getting the direct deposit advance. As of at least 2 years ago Wells Fargo would allow this person to do the advance 11 months in a row, charging $20 a pop = $220. I don't know what the max advance was. Between the compounding fees and the amount this person borrowed they ended up being over $600 in the hole. And that's when they found out about the 11 month max. This is a story that almost ended up with the person becoming homeless. I'm guessing it's not a unique occurrence.
SamSam:
And are they rolling a tax trust into your loan? insurance? Realtor fees? Have you bothered to do the math between the cost of (just) your house versus the (comprehensive) cost of your loan?
Uhm... I'm going to have to call shenanigans here. I could be wrong, but I'm guessing the bank in question is Wells Fargo. I'm guessing this as when I lived in California, Wells Fargo had a Direct Deposit Advance program with exactly those fees. It had *nothing* to do with making deposited checks available.
Essentially, if you had a checking account with direct deposit (i.e. - your payroll check was electronically deposited into your account rather than walking in with a check), you could, through the atms, take an advance on your next payroll deposit for up to $300. The fee ($30) and the advance ($300) were then deducted from your next payroll deposit. Not cheap, but better than standing in line at Check-n-Go if you're stuck in an emergency situation, I guess.
So, to sum up, a teller asks if the author wants a deposit expedited (no mention of fee), the author is curious if there is a fee so he looks on the bank's website, and the author finds an unrelated service and assumes the two are related.
Now, I could be wrong about this all, but next time it's probably better to ask.
Dave
This probably isn't even 120%
If the advance is one day before the direct deposit, the APR is (10% * (365 days/year)/(1 day)) = 3650 % per year
If it's 5 days before the deposit, it's (10% * (365 days/year) / (5 days)) = 730 % per year
And so on...
Unless the loan lasts exactly a month and they're calculating it on a monthly basis (which would be the first time I've ever seen things calculated this way).
In that case, it's 10% * (12 months/year) / (1 month) = 120%/year.
Since most loans like this would be for significantly less than a month (probably less than a week in many cases), reporting the APR as 120% significantly understates the APR and may be in violation of federal truth in lending standards.
@ bardfinn:
Huh? What are you talking about? The only one of those that could make any sense in the context is mortgage insurance, but no, the rates quoted in the article do not include insurance, they never do.
Tax trust rolled into a loan? Huh? Realtor fees? You think I'm getting a mortgage from a real estate agent? What does a mortgage have to do with real estate fees?
Er, yes, of course. A 30-year 6% mortgage on a $300,000 home will end up costing you a total of about 200-230% of the original value of the home. This is the same now as it has always been, that's what 6% means. What does that have to do with anything?None of what you posted has anything to do with the fact that people can certainly get mortgages now, they are certainly at the lowest they have been in a long time, and, besides the fact that they actually do a real credit check nowadays, those loans are the same loans banks have been making for decades.
Thus, your earlier comment that banks would loan to no one, and that when they did they were charging 9%+, is simply wrong. That's all I was commenting on (and provided nice citations for).
@ Anonymous:
If the borrower has a month to pay the loan (i.e. the check has a month to clear), then the loan is for one month. It doesn't matter if the loan is paid back early.
If I take out a 30-year mortgage and pay it back the very next day, I still have to pay the full first month's interest (and, often, steep early payment fees).
"The Finance Charge is a one-time transaction charge and is not dependent upon the length of time the advance is outstanding. The Finance Charge is $2.00 for every $20 that is advanced, which equates to an Annual Percentage Rate (APR) of 120%."
Somebody give me the straight goods:
If this is a one-time trasaction (a 10% fee), how does it have an APR?
Only if they charged it to you every month, you'd pay $24 atop the $20, making it 120% APR. But they're not charging it to you every month--just one time.
I posted this above (#57), but I think it got lost in the mess... As far as I can tell, they are required to report an APR, because technically it's an open line of credit, and technically, they're required to report it (from their website):
#77: Cool, thanks.
Bardfinn@61 nice try: "The term is Yiddish slang originating from the Russian word for winnings, vyigrysh."
http://en.wikipedia.org/wiki/Vigorish
I can't believe how many people are just lapping this crap up!
No wonder Geithner and Paulson thought they could fleece every American citizen for more than the price of a new car!*
Just because the fee is disclosed that doesn't mean its not abusive. What planet are people from where they think its a GOOD thing that bankers rape people like this???
*yes, adding up all the guarantees of bad securities, TARP money, various bailouts and Fed injections which dilute the value of our money, it could buy every US citizen a nice new car.
"200-230% of the original value of the home."
Yup. And two people, both working 40000 / year jobs as professionals, can save enough money inside of six years to buy that house outright - without paying the extra 350000 to 450000 to a bank.
The /real cost/ of that house to someone who financed through a bank is 750000. If they sell the house for 300000, they're still out 350000 (or 450000)
RPL:
The couple that rented an apartment for - oh, hell, let's splurge and say 20000 a year and they stuck it out for eight years - is only out 150000 when, thirty years down the road, they sell their home.
150000
#80 POSTED BY THEBES
Actually what astonishes me as each day of this recession/depression goes on is how many people go out of their way to defend the practices of businesses that could care less about them beyond how much money they could milk out of them.
I don't necessarily think big banks are evil, but c'mon people. Technically banks should charge fees for every single transaction. Anyone who works in a bank knows this. And the main reason these fees don't show up is few people could get away with charging—let's say—a balance inquiry fee.
Nowadays if banks are pushing these fees on folks, that's a sign of them being desperate for money. And that's simply scary...
The real question is why people still use banks that charge you fees? Seriously there are at least 2 banks in any one month mailing me crap about joining their "always free! - forever!" account. I signed up with one in high school and they've given me everything from free banking, no canceled check fees, waived overdraft fees, free same day deposit, hell they've even notarized some legal documents and took my passport photos for me for free! All this from a major, major, nationwide bank. You're an idiot for paying fees to a bank, an even bigger idiot for using a "pay" bank. If you're paying more than $5 a month for your banking fees, you're either exceptionally lazy or completely unaware.
cosmonaught quoted from the original website:
Uh, OK, but there's only ONE BILLING CYCLE, why did they decide there were 12? Because their calendar has 12 months on it? The consumer will not be asked for any additional payments, the term of the loan is infinite.
Back when I was young - several decades ago - I had checking and savings accounts with a certain institution in New York City. I kept the savings account at minimum balance for fee-free checking for several months, until I was flush enough to begin to put money into it. I deposited my monthly check of $N, and asked the teller to put $K into savings and $N-$K into checking. She informed me that "we can't split the deposit, but just write a check against the checking account and deposit it into savings."
That check promptly bounced for "uncollected funds", causing an overdraft fee to be assessed against the checking account and a returned-check fee to be assessed against the savings account. And the transit department responded to this the next day by sending the check through again. And again on the following day. In those days, the bank required 15 business days for a deposited check to clear. But they continued the daily attempts on Saturday and Sunday as well. Until the fees had consumed the entire balance of both accounts. (Which took nearly a month, because I made other deposits, not realizing that the accounts were haemorrhaging cash.)
I found out only when all my other checks
bounced. And the bank refused to give an inch on the fees. The eventual charges were many times the amount of the disputed deposit.
The bank in question failed not long thereafter. I interpret this behaviour as the last gasp of a COO trying to squeeze out every bit of cash to keep a dying corporation afloat.
@#83 POSTED BY HADLOCK:
In a service economy—which is what these kind of fees stem from—you're not supposed to think. It's all convenient.
Honestly, I'm starting to understand it all. The mantra of "follow your dreams" entitlement is what fuels debt and delusions.
I mean, you know folks who pay off their credit card bills in full every month are known colloquially in the biz as "deadbeats."
Agreed, it doesn't make any sense, and I'm not going to pretend to know the law, but I'm sure it has to do something with the Truth in Lending act, or some related amendment.
I'm guessing there's something going on where, for the bank's finances, they're tracking it as a loan, and that means they have certain requirements under TIL, including a federally mandated requirement to disclose APR and a federally mandated way to calculate it. The loan is secured against a deposit, so they don't really need to ever worry about charging interest, but that doesn't get them out of their reporting requirements.
It probably doesn't help them that, very superficially, it's structured like a payday loan, only given by a bank where you have an account and a pending deposit. I'd guess the reporting requirements were toughened-up to impact pay day loans, and Wells Fargo needs to report accordingly.
Ok, here it is, it is a requirement of TILA, and the method for calculation is explicitly defined:
From the Truth in Lending Comptroller's Handbook (PDF!)
If a bank gave you a loan for two years with a simple interest of 12%, that would be quoted as an APR of 6%. That's because it's equivalent to 6% per year.
If a bank gave you a loan for one year with a simple interest of 6%, that would be quoted as an APR of 6%. That's because it's equivalent to 6% per year.
If a bank gave you a loan for half a year with a simple interest of 3%, that would be quoted as an APR of 6%. That's because it's equivalent to 6% per year.
If a bank gives you a loan for one month with a simple interest if 0.5%, that would be quoted as an APR of 6%. That's because it's equivalent to 6% per year.
If you have problems with the meaning of the words "Annual percentage rate," read the wikipedia article or something. And the bank's terms make it clear that a one-time interest fee is the same as an interest rate for one billing cycle, which is an interest rate for one month.
@bardfinn:
I see you're still ignoring the fact that you said mortage rates were 9% and that no one could even get them any more, which was the only thing I was replying to you about, but that's ok. We'll forget it.
Yes, of course. People who get mortgages know this. It' not like you're discovering something new here, that a mortgage costs you over twice the original cost of the house in the long run.
The reason that people do this is that they are making a future bet on where their money will be most valuable.
I actually have saved enough money that I could buy the home I find (if I find it...) outright. Yes I'm still taking out a mortgage to cover 60% of it. That's because I have decided that I would not only make better use of that $200,000 than I would if it were locked into property in a declining market, but that I'd earn a higher return on investment than I'm paying the bank. More generally, though, I'm saying that I'm safer in the future not having 90% of my entire net worth locked into a property in a possibly still-declining market, which is what you're recommending for the "two professionals" above.
See, what you keep being blind about when you state firmly that the "real" cost of a $300k house is $700k and that no one but you seems to get that, is that it's not $700k now but $700k across 30 years. And that's a very real difference. Why? Because $300k in cash now will also be more in the future. How? Well, for a small start, inflation: $300k in 1979 would be worth $1.02 million today. (Note that the amount you pay back on a mortgage does not rise with inflation, meaning you pay less real value every year.) Second: return on investment. If you assume that the market will rise faster than the price of houses (or, these days, that it will fall slower than the price of houses...), then your $300k is worth more in the market than it is in your house. (I feel like this is a high school finance class).
Is it always right to take out a mortgage? No, of course not, it depends on the financial climate and your goals. But to wave wide-eyed at the fact that you end up paying 200% of the cost of a house, as if other people haven't figured it out yet, is a little silly.
SAMSAM emplored:
No, it has been explained ONCE, by cosmonaught, just before you posted your response - everyone else guessed.
So, despite the fact that this loan has no term, we pretend it extends over a year, and we pretend there are twelve payments made, for the sake of comparison, dispite the fact it confuses more than it clarifies the comparison.
Despite the fact it is impossible to pay more than 10% fee, it is somehow comprable to recurring interest fees? It simply isn't, and the fact that the Government says it is makes my BS-o-meter go to eleven.
I'm not trying to be obsinate, I'm trying to make a point - the derived APR is bogus, but since it feeds into the "banks are greedy SOBs" mindset, it is simply accepted and never questioned.
Very simply, it is impossible for this "loan" to ever cost you more than 10% of the loaned amount, but we somehow see this as a valid number to compare with the APR on more conventional loans, like mortgages, credit cards, auto loans, etc. where you actually will pay the APR, so it relates to an actual cost.
If I take advantage of this "service" from the bank on an $800 paycheck, I pay $80 and the money is mine. If I take a cash advance on my credit card for $720 (the same dollar amount as the bank service provided) I'll pay a "service fee" and interest that will extend until I pay it all back, and the ultimate cost may very well exceed the $80 fee the bank charged me, but because the computed APR on the credit card cash advance is 24% (based on the addition of service fees to teh computation), it compares favorably to the (imagined) 120% of the $80 fee? No.
The Truth In Lending Act has failed in this specific case - that's all I'm saying.
A bunch of people are suggesting that there is no real difference between a flat fee and an actual loan with a 120% APR; that we shouldn'd be fooled by the low numbers; that this is usary; that this is the same as Pay Day loans.
It really isn't. It's different. Here's why.
When you pay a finance charge of an extra 10% for expedited check depositing, or a $2 surcharge at an ATM, you aren't entering into debt in the same way that you are when you get a Pay Day loan. The money comes directly out of your account, immediately (I read the Wells Fargo fine print to make sure). You are paying a fee upfront. IF you don't have the money for the fee, your account is negative and you cannot withdraw funds.
This is completely different from getting a loan and having to pay back 110% at the end of the month, like you must with Pay Day loans. Why? Because at the end of the month, the borrower has to be able to come up with 110% (or more). If they can't do this, they can pay a finance charge (often 20% or so) and have to take out the loan again. Now they still have to pay back 110%, but they're in an even worse position because they've had to pay that extra 20%. Yet each month it often appears to be a better choice to pay that 20% (which doesn't go towards paying down the loan, you still owe the same amount) than to pay the entire 110% that you don't have.
This becomes the classic nightmare scenario, where you are taking out new loans to pay of old ones, and paying through the nose without seeing the principle of the loan decrease. This is usury at it's finest, and it destroys people's lives.
To equate this, a one time fee that gets taken out immediately and can't force you into a debt cycle, with usury is just silly and hijacks the very real, very serious conversation. By all means, lobby for banks to have lower fees, or find one that doesn't have any. But the mathematically calculated "120% APR" on this and the very real 120%+ APR that forces people into destructive debt cycles is completely different.
Timothy Hutton: I was saying that people had described the calculation several times, which they have.
But that aside, I agree that this fee and an actual loan at 120% APR are quite different, but for the reasons in my post above, which I don't think are quite your reasons.
The calculation itself is still valid. The only way you can compare loans is by comparing them over the same time period. By convention, this is done per year. It could also be per month (MPRs) or per decade (DPRs) if you like, even for loans that don't last a decade.
In a sense, it's like measuring a chemical in a solution as "milliliters per liter." You can say that there are 10 ml of chemical X per liter of water. This is true even if you don't have a liter of water. "But" you say, "if there are only 5 ml of chemical X, how can you say there are 10 ml of X per liter?" Well, because it's a method of comparison.
So the calculation is fine. That said, you're right, a fee and usury are completely different, as I was saying in my post above.
SamSam: it's not silly: Money is a proxy for effort. If I have a career in which I earn 30000 a year, and thirty years from now I have "adjusted for inflation" 50000 a year (this is a reality for only some of the middle class. The working class can't even expect this. People get laid off, change careers, fired due to age discrimination, outsourced, and on and on), that doesn't cover the fact that I've worked twice as hard or twice as long to get that house AND that half my effort has gone to help someone party.
People want everything /now/. There are many people who are willing to help them get it /now/, in exchange for working twice, three, four times as hard or as long as they would have had to get it if they'd only waited a modest amount of time. The results of that work go into the pockets of the people who got that thing for them /now/.
The world's economic climate has changed, radically, over the past two decades, over the past decade, over the past two years.
Getting mortgages - and thereby "betting", as you put it, on not /your/ future earning power but on the economic climate that produces your economic earning power in fifteen to twenty years - means:
entering into an agreement to pay the note, /no matter what/ - retirement investments? eaten into or gone. Savings? Gone. Second and third jobs: Working them (or, y'know, not because you're "overqualified"). Time with your kids: None. Deciding to have kids: unattractive choice. Mowing the lawn? Don't have time. Struggling to pay the taxes? Yes indeedy. Unemployment (because someone outsourced your job or crashed your industry by sucking all the cash liquid value out of it) : homeless. Medical bills: Unpayable.
In "big" (generic) terms: The economy, which your earning power depends upon, is very il-liquid. Mortgages don't care about market conditions. Mortgages, except for ARMs, don't care about economic conditions and ARMs are engineered to be favorable to the lender in an unfavorable economic climate.
Many Americans - hell, /most/ Americans - are deeply in debt. They owe, they owe, they owe - large quantities of their effort are owed (are il-liquid), they have little or no savings (are il-liquid), their investments tanked (are il-liquid) and their careers are gone, stalled, are in jeopardy or simply can't advance (are il-liquid). The massive reliance on credit made everything in American life depend on liquidity.
Music stopped. Got a chair? Do you care that half the players don't have chairs and one-thirtieth hold half the chairs?
Even if it starts again, it's gonna stop again, within thirty years. Will people have learned how to weather it? Will they have a base from which to weather it? Will there be built-in buffers in American society to prevent some greedy few corporate raiders from engineering a complete collapse of Western civilisation into serfdom?
bardfinn: I understand what you are saying, but what you don't seem to be recognizing is that you are also making a bet by buying the house outright. Both of us, in this situation, are bettors.
The bet that you are making is that 1) you can absorb the loss of $300k liquidity, and 2) the value of your house won't plummet.
But if you lose your job and the economy goes bust, you lost your means of supporting yourself. So sell the house, but if the housing market has gone bust, it's worth nothing. In some places, people can barely give houses away, let alone sell them.
So you've decided that putting, say, 90% of your entire life's savings into a house is going to be to your advantage. It may be, it may not. It's a bet.
Other people, on the other hand, bet that they are safer diversifying their holdings. That might mean putting 50% into the house and holding onto the other 50% for further opportunities.
Further, and most importantly, you are ignoring the lost capital in renting. The couple who rented for 6 years instead of taking out a mortgage are not just paying 100% of the cost of the house, as you supposed. They are paying 100% + $60,000. And that's making the big assumption that they can save $50,000 per year to put towards a house. If you can't save that much (not everyone is a $40k double-income-no-kids), then you are going to be putting much much more in towards rent.
Put it this way. If your family can save $10,000 a year after rent and living, then in 30 years you will have enough to buy a house. In the mean time, you have to pay, say, $2000/month in rent (Cambridge, MA prices...). After that time, you will have paid $720k in rent, and you still won't have a house. You have to pay another $300k for that, putting you $1.2 million in the hole.
If, however, that you took out a 30-year mortgage for which you had to pay $2000 a month (which is normal), then after 30 years you would have paid the same amount as the other family, but you would now have a house. So you would have paid $720k for a house, instead of $720k for no house, putting you way ahead.
THIS is the main calculation for most people, and it doesn't depend on what the markets are doing or bets or anything like that. If you can put down $2000 a month, you are probably better putting that into a mortgage than putting it into a savings account and paying rent. Yes, if you stop being able to pay the mortgage you lose your house, but if you stop being able to pay your rent you lose your house as well.
SAMSAM - Understood and I agree.
SAMSAM said:
Provoked BARDFINN to reply:
BARDFINN, SAMSAM is right - the comparison is not valid - a one time fee is not usury, no matter the current economic conditions, the plight of the average man, the abusive nature of Pay Day loans, the cycle of poverty, etc.
@Timothy Hutton:
I think I use the word "silly" too often... [blush] I'll try to employ a larger vocabulary.
I think bardfinn was replying to my comment #90, where I argued that suggesting mortgages always bad was also "silly." Carrying on two separate conversations -- sorry if I caused confusion!
I don't know whether or not bardfinn still holds that this fee is equivalent to usury.
10 or so years ago BofA had this "cash advance" on your checking account, it was something like $200, whether or not you had the funds to cover it. You would then pay a "service fee" if you used the advance. It was stopped because it was illegal under the banking rules which don't allow banks to loan money, something Savings and Loans are supposed to do. I don't know if the law is the same now but I suspect it is, so this new service, which is basically a Pay Day loan, will likely be stopped as well.
For those that think Banks loan money, they don't. The loans given at a bank are actually through another entity. For example Bank of America Corporation is a Bank and a Savings and Loan, two separate entities but one Corporation. Each has it's own set of rules it must follow.
OK People, I work for the bank you are talking about. It is cheaper to pay $2 or 10% to save you from multiple OD's. However, one thing I do know for a fact is the tellers do not get ANYTHING for pushing that service, period! So why would they? As bankers we HATE that service sometimes because people abuse it and get into trouble and it is a pain in the butt to try to help them once their in so deep. So before you go off ASSUMING that is what the teller meant, think again. Maybe it was close to cut off time and she could have gotten it in before, or maybe she was offering to cash it and deposit cash which would be available immediately. If you had plenty of money in the account, why would anyone even think to offer you a way to get more at a fee? Common sense tells you no!