Food for thought: The banks are missing a big good will opportunity. They could easily set up a program for federal workers. If they bring in their December pay stub, and have a FICO score over 700 the worker can get a loan. Structure it with a 2% fee up front and defer payments and interest until 15 days after the government starts issuing checks.
So if you got paid $1000 a pay period you’d get $980 a pay period until this mess is fixed. If they walk into the bank when they get their check and sign it over to the bank there’s nothing else due.
The bank would lose a little money on the deal but gain good will. They could even waive the 2% for customers which might induce some folks to open an account with them which would be worth more to the bank in the long run than the 2%. If you market the hell out of the program they can buy a lot of brand loyalty.
I spoke to folks about this yesterday and I got some DMS. Here are some additional thoughts:
- Why a FICO score of 700?
It's been a long while since I've needed to access credit or have done any financial coding. I remembered that 700 was considered "good". I was wrong 670 is "good" so 670 would be the benchmark.
- Isn't using the FICO score discriminatory?
Yes, all lending shows a bias towards people with a good credit history. The bank has a responsibility to their shareholders and depositors to ensure that loans are paid back. Perhaps banks could ignore the FICO score for their current customers with Direct Deposit with the understanding that the bank is going to slurp the money back automagically when paychecks resume.
- What would happen if someone didn’t pay?
It would convert to a normal personal unsecured loan. I believe 24 months at around 15% would be normal.
- Why the 2% fee?
To defray the bank’s fixed costs / administration fees. They are already lending money below the discount rate. Let’s face it the Payday lenders will be charging 20%.
- What if people decide not to pay the loan back? / What if people scam the system and get loans from multiple banks (if more than one bank ran similar programs)?
The same as if someone doesn’t pay an unsecured loan back. Court, sheriff, reposition of funds, paycheck garnishment, etc.