Are payday loans cheaper than bank fees?

The cash advance loan industry is well regulated in a few states and ignored in others, but one thing remains the same everywhere - customers take out those high interest loans because they want to. No one forces Americans to take out these cash advances and the businesses are required to fully reveal the repayment terms ahead of time. Payday loan customers, for better or worse, know what they are buying. The quick cash loan industry charges rates of five hundred to one thousand percent from people who often cannot afford to take out a loan elsewhere.

Continued below

Quick cash loans are undoubtedly costly, with interest rates that can top 1000% annually, but a large number of people pay a similarly high price for bank overdrafts without even knowing it.

If an individual writes a personal check or makes a debit card purchase for more money than she has in their account, the bank will honor the purchase, but the individual will then be penalized for the overdraft. The total cost of bank overdrawn amount protection is more expensive than you might think; a $35 fee, repaid in fourteen days' time, amounts to 910% interest annually and that can double to a staggering 1820% if the customer pays within a week. Customers are not necessarily aware of how much they are paying their banks or credit unions for overdraft loans or overdraft "protection" as it is often called. Many banks now provide overdraft protection as a built-in feature of their checking accounts. Overdraft charges differ from company to company, but typically range from $20-35 for each transaction.
 

Overdraft protection is high-profit business for the banking industry, which takes in more than ten billion dollars annually in overdrawn amount charges alone. Overdraft protection amounts to profitable lending, but unlike quick cash loans or cash advance loans, individuals do not always know that they are even borrowing. If individuals realized that this protection is really a loan, they might be less likely to make use of it, especially if they were aware that overdrawing a checking account by five dollars still comes with a $35 fee.

It is unfortunate that banks routinely include the bad check protection feature and do not allow individuals to elect not to use it. When individuals do not know how much money they have in their checking account bad checks are all the more probable. The ability to spend more money than you might have in your account is useful, particularly in view of the fact that not many people ever manage their checkbook correctly. The person gets no notice if he or she is on the verge of overdrawing the account; the coverage kicks in, and the fee is instantly assigned.

In an ideal world, financial institutions would be required to notify clients that such protections are in place, and they would also be required to permit people not to participate if they wanted to do so. Given the current mood in The White House and Congress' somewhat favorable view of the financial industry, it seems unlikely that any legislation protecting consumers from excessive bank charges will come along in the near future. As a means of saving money, we suggest that consumers look at their checkbooks a bit more frequently.