Getting a payday loan instead of an overdraft fee saves money

Wells Fargo

Wells Fargo charges people $35 per overdraft, and at that rate, its cheaper to get a payday loan. Image from Wikimedia Commons.

It might seem inconceivable that Americans could save money by borrowing a payday loan sometimes. Industry critics usually have good intentions. However, something often goes unmentioned while the cash advance industry is raked over the coals. If an average person gets a payday loan to keep from going into overdraft, that person saves money.

An overdraft works like a payday loan

An overdraft charge works sort of similarly to payday loan, in a way. A certain amount of money is loaned, by a bank, and then a fee is assessed for lending the funds to cover a transactions. Basically, an overdraft is the same thing as a short term loan from a bank. The difference is, no one really wants to overdraft, and a lot of people do it accidentally. Thus, when a people overdraw their accounts, they aren’t usually choosing or deciding on the amount they want to borrow. And it adds up fast because if customers make multiple overdraft charges, the overdraft fee is charged each time. Overdraft fees from Bank of America and Wells Fargo are $35 per occurrence. It has been estimated that up to 60.4 percent of income for credit unions is from overdraft fee revenues, and more than 43 percent of non-interest income and 21 percent of net operating income for banks. That’s an awful lot of fast cash.

Overdrafts add up

A study published by Bretton Woods Inc. in 2010 reported that the average household with an active checking account incurred 12.7 overdraft fees or non-sufficient fund fees in 2009, which marked an increase from the 11.8 NSF/OD fees in 2008. The average NSF/OD fee, from the same study, was $29.58 in 2009, meaning that at 2009 rates, the average household with an active checking account pays $375.67 or more in OD/NSF fees annually. The average payday loan is $350, and the average fee is $47.50. Because multiple overdrafts can occur easily, and fees are charged per occurrence, it is cheaper to get a payday advance than an overdraft.

Banks are institutions

Why do banks get off the hook for these fees? Well, it’s simple. Banks are institutions, and some people think that institutions should never be held accountable because they are institutions. You can read more in the Payday Lending Facts and Statistics report on Personal Money Store.