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What’s The Best Deal – Payday Loans or Overdraft Fees?
September 5th, 2011
If you go with a payday loan, pay it off quickly
A new study into the financial habits of those who rely on loans suggests that they may be better off going to a payday lender.
Moebs $ervices
Moebs $ervices, an economic research firm that conducted the study, found that consumers who bounce a check get hit, on average, with a $28 non-sufficient funds fee by their bank. That’s compounded by an average $30 penalty assessed by many retailers. Some banks let you avoid the embarrassment of a bounced check by offering an overdraft service, but the study found that those cost you an average of $34 per check.
Overdraft fees
Overdraft fees differ a bit from institution to institution; according to RateWatch. Credit unions tend to be a bit more lenient, charging check-bouncers an average of $27 versus $31.17 at banks. But either way you cut it, consumers who try to spend more money than they have wind up paying dearly for it, and the report estimates that approximately 34 million people bounce checks more than 10 times a year.
Alternatives
So what’s your alternative if payday is a few days away and the cash in your checking account doesn’t cover the purchase you want to make? Credit cards are, of course, the weapon of choice for consumers who want to spend more money than they have. But for those who don’t qualify for a credit card, there’s an alternative: payday loans. “Payday lenders can provide a good alternative source,” says Mike Moebs, the firm’s CEO. “The small loan market … is driven by people who don’t have FICO scores high enough for a credit card.”
Are payday loans really a good deal?
Like any high-interest loan, it depends on how quickly you pay it off. Moebs points to the example of someone with $500 in the bank who needs to make a $700 purchase. A $200 loan at 17.5% per pay cycle means an extra $35 on top of the $700, provided you pay it off as soon as the next paycheck comes. If the alternative is bouncing a check and losing more than $50 between the bank and the merchant, clearly the payday loan is your better bet. With that said, most payday borrowers aren’t quite so responsible. Moebs says that the average payday loan is a little under $500, and gets paid off in 3.1 pay cycles, which means that the interest will build up quite a bit more. And a study conducted earlier this year by a consumer watchdog group found that payday lending often led people to long-term debt problems.
Decision
So if you need a small loan to get you to payday and you’re confident you can pay it off in time, a payday loan beats bouncing a check if you can pay the loan quickly.
People in the U.S. Prefer Payday Loans
August 7th, 2011
Blame it in high overdraft fees
Despite the widespread criticism, it seems that payday loans are here to stay. Initially bank overdraft fees remained very high and few banks found ways to charge their consumers and put them in a cumbersome state but with payday loans things have changed to a large extent.
The Consumer Federation of America
According to recent study by the Consumer Federation of America, when the new laws regarding overdraft fees came into being, the fees as usual remained very high and banks found ways to charge their consumers and put them in a cumbersome state. The latest news by federation reveals that on an average overdraft fees range from $33 to $37. Most of the borrowers draw only a few dollars that are urgently required. This led the banks to reap annual interest rate of more than one thousand percent for very short term loans. Therefore payday loans came into existence.
Bank overdraft fees
Moreover Jean Ann Fox, the federation’s director of financial services stated in an interview that bank overdraft fees at various banks are very high. She also said that if the cost is calculated and compared to payday loans, then the banks are charging triple and quadruple digit interest rates to the money borrowed when the entire fee is put together. In addition, banks continue to manipulate transactions for the purpose of minting more and more fees. Instead of processing transaction in a systematic manner, many banks process the largest transactions first which is not fair by any means. But this policy is not followed now. So the people are inclined more towards quick cash loans.
Federal Reserve
Jean Ann Fox also emphasized that due to bank overdraft some innocent customers also have to pay an interest of $370 per day for a very nominal amount of money, which is quite high. Initially Federal Reserve passed rules for taking permission from the people before charging overdraft fees and if the customer looks forward for purchasing then that would overdraw the account and the purchase will simply be curtailed.
New laws
Nevertheless federation formulated new laws to handle exceptional cases. Various banks do not charge overdraft fees for ATM and debit card transactions and the transactions are also being processed in a systematic manner rather than giving priority to the account with heavy amount. Even some premium banks do not permit overdraft for purchases, but they do charge thirty five dollars if a customer overdraws his account by drawing money from the ATM.
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