A Closer Look at Pay Day Loans vs. Bank Overdraft Fees
Written by: Alan Luong
According to the New York Times "many national banks are
encouraging clients with low balances to overdraw their checking
accounts, allowing the banks to avoid credit laws and collect
billions of dollars in new fees." You might now realize that pay
day loans are actually much more economical than overdraft fees
from your bank.
The banks say that the overdraft programs, which cover bounced
checks and allow people to overdraw their accounts, are a
service to their clients. But these overdraft programs are
certainly a bad deal for consumers.
Unlike typical lines of credit, which charge annual interest of
up to 20 percent, the new overdraft plans charge flat fees for
every processed overdraft, translating into an annual interest
rate of over 1,000 percent. Unlike lines of revolving credit,
which allow customers to repay the loans at their convenience,
these plans require clients to bring accounts back into positive
balance in only a few days. While most traditional lines of
credit have limits of thousands of dollars, the new overdraft
plans have limits of $100 to $300. After the overdraft is
expended the banks again start bouncing checks.
The New York Times also states that "the rapid spread of the
programs has turned overdrafts, and the fees that come with
them, into one of the largest sources of profit for banks,
according to consultants and statistics compiled by government
bank regulators. Washington Mutual, the nation's seventh-largest
financial institution and the largest to promote overdraft
protection, charged customers more than an estimated $1 billion
in overdraft fees last year."
Industry analysts claim the overdraft plans, which contain fees
as high as $35 per overdraft, are really high-interest loans
targeted at working-class customers. Unlike pay day loans, which
charge only a regulated flat fee for providing direct cash, bank
overdraft programs work automatically with checks and debit
cards. Customers often don't even realize they have overdrawn
their checking and savings accounts until they are notified by
from the bank.
"Some banks are looking at the fact that some consumers barely
make it from pay day to pay day and have a very low balance, and
instead of offering them a beneficial service, they are charging
their customers bounced-check fees to take advantage of the
situation," said Jean Ann Fox, director of consumer protection
for the Consumer Federation of America.
A recent study by the Federal Reserve last year found that banks
have increased raised their overdraft fees 24 percent from 1997
to 2001, to an average of $20.42. That's an average of $20.42
for each individual overdraft item! And it gets worse. Banks
have sophisticated software programs that ensure that your
largest checks and debits are processed first. This means that,
if your account if going to go negative and overdraft is
required, that a higher number of smaller transactions will each
incur the overdraft fees. Add in the average merchant penalty of
$15 per returned check, and five overdraft items for $200 could
add up to almost $375 including charges! By contrast, pay day
loans for $200 would incur fees of only $45-$60.
When you're caught short between your paychecks, take a closer
look before using your bank's overdraft protection programs.
It's very likely that you'll find pay day loans from Personal
Cash Advance: payday loan will save you quite a bit of your hard
earned cash over just a 10-day period.
About the author:
Alan is the site owner of http://www.dezeinfo.com, which is a
loan site that provides you information on payday loan such as
how to get started, where to apply, and how to avoid online loan
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