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Payday Loans Boosted As Bank Charges Exposed

[Dec 11, 2008.]


Payday Loans Often Cheaper than Bank Overdraft

A report published last month suggests that a payday loan may sometimes be cheaper than a bank overdraft. The report, from the Federal Deposit Insurance Corporation (FDIC), is based on a survey of banking practices, and exposes what some may regard as profiteering on the part of all sorts of banks--but especially large ones.

'Automated Overdraft Programs' Expensive

The survey says that more than three-quarters of large banks (those with assets of over $1 billion) operate so-called 'automated overdraft programs' (AOPs). These are usually computer-driven systems that automatically decide whether to allow an NSF (nonsufficient fund) transaction to go through. In other words, the bank's computer checks the customer's credit record and chooses whether to permit a payment to proceed even when there is not enough money in the account to cover it.

Charges for AOP transactions tend to be very high, which perhaps is why most banks enroll customers in the scheme without first asking them. By contrast, 'linked transfer accounts' (where an overdraft is avoided because money is automatically transferred between checking, savings, and credit card accounts) tend to attract small or no fees, which may be why 94.7 percent of banks only set them up on request.

Among the banks surveyed by the FDIC, the median automated overdraft fee was $27 a transaction, although some charged $38. A number of banks also levy additional fees and/or interest on continued negative balances. A large majority of banks don't warn a customer who is asking for a transaction at an ATM or in a store that he or she is in the process of becoming overdrawn and so liable for fees.

Payday Loans Cheaper?

According to the CFSA, one of the industry bodies representing payday loan lenders, it can cost $54 in NSF penalties and merchant fees to bounce a $100 check. That represents an APR (annual percentage rate) of 1,409 percent. And it compares badly with the APR of 391 per cent for the $15 fee that a $100 payday loan would attract.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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