Payday loans - Cheaper than your bank’s overdraft fees?

Cash advance loans or quick cash loans are certainly expensive, with rates that can top 1000% per year, but a large number of people pay almost as much for checking account overdrafts without even knowing it. .

No one forces consumers to take out payday loans and the lenders are required by law to fully disclose the repayment terms ahead of time. The short-term lending industry is well regulated in some states and ignored elsewhere, but one thing remains the same everywhere - customers apply for those high interest loans by choice. Cash advance borrowers, for what it's worth, know what they are buying. The payday loan industry charges interest rates of 500-1000% from customers who often can not afford to take out a loan somewhere else.

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The total cost of bank overdraft coverage is more than you may realize; a $35 charge, repaid in 14 days' time, adds up to 910% interest per year and that doubles to a staggering 1820% if the customer pays in a week. A large number of banks or credit unions now provide bad check protection as a built-in feature of their checking accounts. If an individual writes a personal check or makes a debit card purchase for more money than he or she has available, the bank will honor the purchase, but the customer will then be billed for the overdraft. Clients are not often informed of how much they are paying their financial institutions for overdraft loans or overdraft "protection" as it is frequently called. Overdraft fees differ from one institution to another, but frequently range from $20-35 per transaction.

If people understood that this protection is really a loan, they might be less likely to utilize it, particularly if they were aware that overdrawing a checking account by ten dollars still requires a $35 fee. Bad check protection amounts to successful lending, but unlike payday loans or quick cash loans, individuals don't always realize that they are even taking out a loan. Bad check protection is high-profit business for the banking industry, which earns more than ten billion dollars a year in overdraft fees alone.
 

It is unfortunate that banks or credit unions routinely include the overdraft protection feature and don't allow customers to "opt out" of it. When Americans do not know how much cash they have in their account overdrafts are all the more likely. The consumer receives no warning if she is on the verge of overdrawing the account; the coverage automatically kicks in, and the charge is automatically assigned. The ability to spend more money than you might have in your account is useful, particularly in light of the fact that few people ever balance their checkbook properly.

As a means of saving a few dollars, we recommend that customers look at their checkbooks a bit more frequently. Given the current climate in The White House and Congress' somewhat favorable view of the banking and lending industries, it seems improbable that any legislation protecting Americans from above average bank charges will appear any time soon. In a perfect world, financial institutions would be required to inform individuals that such protections are in place, and they would also be required to permit people to opt out if they elected to do so.