Even though APR is not entirely compatible with payday loans (which are often two-week loans, making full-year interest rates immaterial), lets assume for the sake of argument that 391 percent is accurate.

Next, let’s assume that consumers facing a small financial crisis will rely upon a product like checking overdraft protection once in a great while if their balance is low and an unavoidable expense threatens to overdraw their account. Overdraft protection of this nature is quite common and readily available, in much the same way that no fax payday loans are available for short-term cash problems.

Is Overdraft Protection a More Cost Effective Option Than Payday Loans?

A November 2008 study by the Federal Deposit Insurance Corporation (FDIC) answers that question with a resounding NO. In fact, their study of 1,171 FDIC-supervised banks presents hard data that proves that their overdraft programs are prevalent, often deceptive, generate tremendous revenue and exploitative. Here are some highlights:

Overdraft is prevalent…

• 86 percent offer at least one type of overdraft program

…deceptive…

• 75 percent automatically enroll customers without asking; customers must voluntarily opt out. In some cases, the option to opt out isn’t even available
• 81 percent permitted overdrafts at ATMs and points of sale (POS), and most informed customers of the overdraft only after it occurred (88.8 percent for POS and debit transactions, 70.7 percent for ATMs)

…generates tremendous revenue…

• Median overdraft fee is $27; a $27 fee for a single $60 instance, repaid in two weeks, translates into a 1,173 percent APR
• Banks earned $1.97 billion in NSF fees in 2006, which was 74 percent of all service charges and six percent of net operating revenue
• Banks with overdraft programs had higher NSF-related fee income than other banks
• Customers with 5 or more NSF transactions over the 12-month period of the survey accounted for 93.4 percent of total NSF fees reported
• Customers with up to four NSF charges paid $64 per year on average; those with 20 or more paid $1,610

…and exploits customers

• Approximately one quarter of the banks with automated overdraft protection also assessed additional fees on top of the NSFs for retaining a negative balance
• Accounts held by customers in low-income areas (media household income below $30,000) were more likely to incur overdraft charges than those in higher income areas; more than 38 percent of low-income accounts had at least one NSF fee, compared with 22 percent of upper-income accounts
• Assuming the median $27 overdraft fee, a customer paying a $20 POS/debit overdraft in two weeks would pay an APR of 3,520 percent; a $60 ATM overdraft would be 1,173 percent; a $66 checking overdraft would be 1,067 percent
• If overdraft fees are repaid more quickly, the resulting APR is actually higher
• Accounts held by customers 18 to 25 are much more likely to incur NSF activity (46.4 percent)

Before a consumer relies upon overdraft protection to cover themselves in the event of a short-term financial emergency that can drain their account, they should consider the facts. The expense of this service alone is prohibitive, and banks don’t make it easy to get rid of (or even get rid of in some cases). Payday loans are a safer, less expensive, more convenient option for consumers who wish to escape excessive debt rather than create it.

Ever needed a payday loan to cover overdraft fees or ATM fees that your bank has charged you? If you haven’t, you just might be looking for one sooner than you think. Because of economic turmoil, banks are forecasting that overdraft fees and ATM fees will continue to rise above the average of $34.65 and $1.98, to try and cover losses over bad mortgage loans and poor investments. So what does this mean for you? Hopefully better budgeting and planning.

Paying Interest to Access Your Money

As convenient as an ATM machine is, you should really pick and choose which ones you use. Most banks charge a fee for using competitors’ ATM machines and sometimes that fee can be up to $2.50. If you only take out $20, you’re paying 12.5% interest on your own money. It’s kind of ridiculous, huh?  A payday loan that is paid back on the very next payday has less interest then that. The best way to avoid these fees is to use your bank’s ATM machine or find out which ATM machines are in your bank’s network. Planning ahead can make a world of difference on your bank statement.

Pesky Overdraft Fees

We have all over drafted our accounts for extra money for something at one point or another; it happens. My personal favorite though is when I purchase something at the grocery store after my paycheck has been deposited into my account and because deposits get posted after debits for the day, I get charged an overdraft fee even though the money was in my account before I made the purchase. Banks look for any way possible to charge you a fee to help boost their bottom dollar. What’s even worse is some banks charge an overdraft fee for every purchase over your limit, no matter how small, and then charge you for every day that your account is in the negative.

Where Does It End?

It doesn’t end, plain and simple. Banks will keep raising fees no matter what. The real question is, how much will they rise? Even if your bank is not raising its overdraft fees, you should really look into what fees they are raising. Banks are tacking on fees to savings accounts for too much activity in the account or if you keep a balance over a certain amount. It kind of defeats the purpose of saving emergency funds if you’re going to get charged to do so. Other fees rising include service fees, overdraft protection fees, and bounced check fees for those accounts that do not have overdraft protection. The best thing you can do is get a list of all the fees your bank charges and then ask how each of the fees applies to your account.

Knowing Is Half the Battle

Being responsible about your checking and savings account is the best advice I can give you. Make a budget and pay attention to accounts by balancing your checkbook and watching activity online. Knowing what’s going on with your money at all times is half of the battle with bank fees. Times do get rough though and accidents are bound to happen. If you find yourself in a crunch with the bank, there is always a payday loan around to bail you out.