PayDay Loans and PayDay Advances - Which is Better
Can Payday Loans be Cheaper than Checking Overdraft Fees or PrePaid Debit Cards?
Last Updated: May 26, 2010
I've written a few articles and blog posts roiling against the payday loan industry. I'm really not liking the conclusions of this article, but it looks like payday loans can be cheaper than checking accounts.
According to a study by the consulting firm Bretton Woods Inc, U.S. banks recognize the fact that middle income customers present the greatest potential to harvest fees. The bulk of these fees are checking account overdraft fees, accounting for over 90 percent of all bank fees.
Three quarters of banks automatically enroll consumers in their "overdraft protection" programs without formal permission, and more than half of banks manipulate the order in which checks are cleared to trigger multiple overdraft fees, according to a Federal Deposit Insurance Corporation study.
- Bank and credit union income from non-sufficient funds (NSF) and overdraft program (ODP) fees exceed $34.7 billion.
- NSF/ODP fee income by state ranges from nearly $40 million in Wyoming to $3.2 billion in Texas.
NSF/ODP Cost per Household
- The national annual NSF cost per household with checking accounts is approximately $343.
- Active households (defined as the 20.2 million households with bank or credit union accounts who write the majority of NSF items) pay $1,374 in annual NSF fees.
Payday Loans vs Overdraft Fees
This was a hard fact for me to swallow, but overdraft fees can be more expensive than payday loans. Here are the calculations:
$100 advance incurs an $18 fee.
$100 bounced check incurs a $35 overdraft fee.
Pretty easy to see which is cheaper. Now we are not encouraging the use of payday loans!! You can get into very serious trouble taking out a payday loan. Loan fees often make it impossible for them to pay off their loans with upcoming paychecks.
PrePaid Card Fees vs Overdraft Fees
A better alternative to payday loans would be a prepaid debit card. These cards typically cost $70 to $80 a year ($10 upfront with a $5 monthly fee). Users direct-deposit their paychecks onto the cards (the money is FDIC-insured) and can do point-of-sale transactions and pay bills online. There are no overdraft fees; the purchase is declined if the card is empty.
Prepaid cards may also help you if you have a black mark in ChexSystems, the "credit score" of checking accounts. Prepaid cards do not check you out via Chexsystems, so you cannot be turned down.
Please Note: We only mentioned the alternatives to checking accounts to give you an idea of actual costs. If you absolutely can't manage your checking account, maybe you should consider one of them. Of course, if you already have a checking account, you can prevent overdraft fees by just keeping better track of your account balances.
Overdraft Fees by Bank
|Bank of America||$25 each item. Beginning February 9, 2009, $35 each item||Charges apply to a maximum 5 items per day or $175 per day|
|US Bank||1 occasion $19.00 per item; 2-4 occasions $35.00 per item; 5 or more occasions $37.50 per item||Fees are subject to a daily maximum of 6 overdraft items paid and 6 overdraft items returned - a maximum total of 12 per day or $424 per day|
|Citibank||$34 per item||No daily limit|
|Wells Fargo||$33 for every overdraft fee and $28 for every NSF fee||There are overdraft protection transfer/advance service fees depending on which account is linked to the Checking Account for Overdraft Protection:
|SunTrust||$35 per item||No daily limit|
(Table data is taken from web site survey conducted by Bretton Woods, Inc, on December 15, 2008)
What You Can Do to Avoid Overdraft Fees
- Keep track of how much money you have in your checking account by keeping your account register up-to-date. Ok, I haven't balanced my checking account in years, but I check my balance online several times a week.
- Make sure there are extra funds in your checking account to cover any checks or fees you might have forgotten. Just an extra $50-$100 in your account at all times can save you hundreds of dollars in overdraft fees.
- Pay special attention to your electronic transactions. Record your ATM withdrawals and fees, debit card purchases, and online payments.
- Don't forget about automatic bill payments you may have set up for utilities, insurance, or loan payments.