Overdraft Programs Can be as Dangerous as Payday Loans … Or Even Worse
By J.J. CameronPayday Loan Writer
The Witchita Eagle raises an issue that can be as risky as a payday loan: overdraft protection programs.
You can see billboard across the city for these Fidelity Bank services, advertised as "Your checkbook's best friend." And, don't get us wrong, people who occasionally bounce a check may appreciate it.
The program, like those at other banks, covers an overdrawn check instead of returning it to the merchant. Banks, of course, call the programs a courtesy to customers. Payday advance companies do the same for their loans.
But the Center for Responsible Lending calls them high-dollar loans. The group worries that some people are becoming too reliant on overdraft programs. Consumers spend $10.3 billion a year in overdraft protection fees, the bulk of that by repeat users who are continually overdrawn, a recent study by the center says.
"For repeat users of overdraft," said Eric Halperin, senior policy counsel for the center, "this is a credit source that in the long run is going to cause more harm than good."
Al Sanchez, a spokesman for Fidelity Bank, said the service is a "purely discretionary courtesy or privilege that the bank may provide to our customers from time to time … It is that simple."
The programs work this way: Qualified users essentially get a cushion, usually $300 to $500. If the customer makes a purchase that would overdraw his account, the bank uses that cushion and pays the amount instead of rejecting it. It could be considered similar to a payday advance loan in that it's meant to protect you from falling into debt.
Then, the bank charges the customer a fee - $29 for each overdraft at Fidelity. Banks that offer overdraft programs stress that they still have the right to return an item, which would result in an overdraft fee and a fee to the merchant.
The problem is that the bulk of the fees are being paid by repeat users. The center's study found that 16 percent of overdraft program users pay for 71 percent of the fees banks and other financial institutions collect. In some cases, the flat fee would be more than an instant payday loan fee.
For example, a $100 overdraft, with an automatic overdraft program, would cost a consumer about $27. In Kansas, the most a payday lender can charge is 15 percent, so a $100 loan would cost $15.
"These are very small-dollar-amount loans. Most of the dollar amounts are certainly below $100 and, with debit cards, certainly lower than that," Halperin said. The center would like to see banks give consumers a choice about how they want to protect their accounts from overdrafts instead of automatically enrolling them in such programs, he said.
The ATM temptation: Because of technology, consumers have more ways than ever to overdraw their accounts, including at an ATM or during a debit-card transaction.
Some banks with automatic overdraft programs allow consumers to take out money from an ATM even if the consumer doesn't have enough money in his account. This is a problem. In such a cash, acquiring a no fax cash loan really may be a better alternative.