Bounced Check Fees Exceed Cash Advance Loan Fees by Billions
Bank overdraft fees have begun drawing more opposition than cash advance loan fees because these unexpected costs often trap consumers in cycles of debt. According to an article posted at Chicagotribune.com, overdraft fees often lead to additional bounced checks, and the costs multiply out of control. Many consumers face impossible challenges to cover these costs.
The Consumer Financial Protection Bureau estimates that electronic debits incur median overdraft charges of $24 for each transaction, and these debits are often presented to banks multiple times where they continue to generate outrageous fees. The CFPB has stated that it wants to address the problem, but Republicans and President-elect Donald Trump have vowed to curtail or abolish the agency as a prime initiative when Trump takes office in January of 2017.
Banks can simply decline electronic debits without incurring any administrative costs, but most banks still charge inflated fees of about $35 for each electronic overdraft. Banks aren’t willing to give up this lucrative source of income. Ironically, banks earn billions on overdrafts while criticizing short-term lenders for trapping borrowers in cycles of debt. Banks are often just as responsible for creating debt traps as short-term lenders.
Cash Advance Costs Don’t Compare to Bounced Check Fees in Trapping Consumers in Debt Cycles
Overdraft fees are big business, and they exceed the fees that payday lenders earn on legitimate cash advance loans by orders of magnitude. Banks earn more than $31 billion in overdraft fees according to a report posted at Money.usnews.com. Lenders, however, only earn about $7 billion a year in fees from 16,000 storefronts and online operations according to CBSnews.com.
The average fee that each cash advance loan earns is $55 for a two-week loan. That compares to banks that earn hundreds in bounced check fees in the course of a single day. The bank takes no risks and incurs no expenses for denying several electronic transactions. Part of the problem results from online lenders trying to debit bank accounts multiple times, so short-term lenders certainly bear some of the responsibility. However, these lenders receive nothing from multiple overdraft fees; the companies are only trying to get the money that their customers promised to repay.
Pew Charitable Trust asserts that cash advance loan companies debit these accounts to trap borrowers in cycles of debt according to the CBS report. Consumers with big debts are more likely to take out multiple cash advance loans and stay in debt for most of the year. However, a spokesperson for the Community Financial Services Association of America, the cash advance trade organization, disagreed and cited data showing that most borrowers know the risks and repay their loans as promised.
Online Cash Advance Fees and Interest Aren’t as High as Multiple Overdraft Fees
Many families get trapped in debt after getting an online cash advance, but the problems are often caused by multiple overdraft fees. Anyone who is charged hundreds in bank fees still has to pay the costs of any online cash advance that triggered the overdraft fees. In these cases, people often have no choice but to take out another loan.
Cycles of debt can be extraordinarily difficult to manage, but consumers can address the problem by taking immediate action. It’s important when confronted by escalating costs that you try to solve the problem without creating more debt. Best practices for dealing with overdrafts include:
- Transferring money from another account
- Selling or pawning something of value to get out of debt
- Checking with local community services and religious organizations for financial help
- Working more hours or finding a part-time way to earn money
- Securing a loan from your employer, a family member or friend
- Calling the bank and asking a manager to waive the fee
- Explaining the problem to your lender to see if there are other financing options
- Getting overdraft protection at your bank
Overdraft protection can prove expensive, but it’s usually cheaper than overdraft fees on both sides of a single transaction, but consumers should recognize that this protection shouldn’t be used as alternatives for loans. The costs can add up to more than online cash advance lenders charge if you routinely use the protection as a loan alternative to obtain cash.
Colorado Introduces a Better Model for Cash Advance Loan Fees
Colorado has passed regulations designed to protect consumers from cash advance loan fees according to the CBS report. A 2010 state law replaced short-term, payday-type loans with six-month cash advance loan products that are repaid in installments. The state limits APR rates to 45 percent, and the initiative has dramatically reduced default rates and overdrafts. Almost 75 percent of borrowers are able to repay their loans early according to Pew Charitable Trust.
Consumers can repay cash advance loans more easily when they don’t have to repay the entire amount of the loan from a single paycheck. This arrangement reduces bank overdrafts because payments are more affordable.
Irate Consumers File Lawsuits Against Banks Based on Their Overdraft Fee Policies
Lawyersandsettlements.com reports that many consumers have filed lawsuits against banks because they charge unfair fees. The report cites high-profile lawsuits against Bank of America, Wells Fargo, M&T Bank, Wachovia, UMB Bank and others. The grounds for these legal actions include:
- Fees for going over the account balance in electronic and ATM transactions
- Debiting accounts multiple times for a single transaction
- Approving overdrafts and charging astronomical fees for the service
- Paying larger transactions before smaller ones to increase the number of potential overdrafts regardless of when the debits are presented
- Implementing authorization holds for future transactions that reduce available balances and result in legitimate debits generating overdrafts
- Charging fees to cash legitimate checks for non-customers that are drawn on the bank
These lawsuits have resulted in large settlements for consumers. Wells Fargo was ordered to pay $200 million to California customers who were overcharged. Consumerismcommentary.com reports that Bank of America received a judgment of settlement in a class action lawsuit for overcharging fees in the amount of $410 million. Banks aren’t the only institutions charging high overdraft fees–many credit unions have been increasing their fees for overdrafts, ATM withdrawals and debit purchases.
Banks have settled lawsuits, but they continue charging fees because the settlements only make up a small percentage of the billions that they earn from overdraft fees and other questionable charges. Find out more about cash advance fees and overdraft charges at the Personal Money Store.