Are payday loan costs cheaper than bank costs?

Payday loans or cash advance loans are undoubtedly expensive, with rates of interest that can reach 1000% annually, but many customers pay a similarly high price for checking account overdrafts without even knowing it.

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The payday loan industry is governed by tough laws in a few states and ignored in others, but one thing remains constant - customers take out those high interest cash advances because they want to. Cash advance borrowers, for what it's worth, know what they are getting. No one forces consumers to take out cash advance loans and the lenders are required to completely disclose the terms of the loan in advance. The quick cash loan industry charges interest rates of 500-1000% from consumers who In many cases cannot afford to take out a loan elsewhere.

The overall cost of bank overdraft protection is higher than you might realize; a $35 fee, repaid in fourteen days' time, amounts to 910% interest annually and that doubles to an astounding 1820% if the customer repays within a week. Many banks now include overdraft protection as a built-in part of their checking accounts. If a person writes a personal check or uses a debit card for more money than he has in their account, the financial institution will honor the transaction, but the customer will then be charged a fee for the overdraft. Overdraft charges differ from bank to bank, but typically range from $20-35 for each transaction. People are not necessarily informed of the amount they are paying their financial institutions for overdraft loans or overdraft "protection" as it is often called.
 

The individual gets no warning if he or she is about to overdraw the account; the protection kicks in, and the charge is instantly assigned. It is unfortunate that financial institutions routinely include the overdraft protection and don't permit customers to elect not to use it. The ability to draw more money than you might have in your account is useful, particularly in view of the fact that few consumers ever balance their checkbook properly. When people do not know how much cash they are supposed to have in their account overdrafts are much more likely.

If consumers understood that this coverage is actually a loan, they might be less inclined to make use of it, especially if they knew that overdrawing an account by $5 still requires a $35 charge. Bad check protection is profitable business for the banking industry, which takes in at least ten billion dollars annually in overdraft fees alone. Overdraft protection adds up to successful lending, but unlike payday loans, individuals don't always know that they are even borrowing.

In a perfect world, banks or credit unions would be required to notify customers that such protections are in place, and they would additionally be required to permit customers to back out if they elected to do so. Given the current mood in Washington and Lawmakers' rather favorable view of the banking and lending industries, it seems unlikely that any laws protecting individuals from extreme bank charges will come along any time soon. As a means of saving money, we recommend that individuals balance their checkbooks a bit more often.