Payday Lending vs. Bank Overdraft Fees

By: Michael New Jr.

It is apparent from reading the newspapers and browsing the internet, that payday lending has a lot of critics, and receives quite a bit of negative publicity. The arguments they make against the industry are that the interest is outrageous, that they prey on the poor, uneducated masses, and that they trap people in a cycle of debt that they cannot get out of, except through bankruptcy.

Let us examine these arguments a little closer. A common argument is that the interest rates on a payday loan are extremely high, usually around 500% - 600% APR. The first problem here is that while payday loan companies are required by law to disclose an annual percentage rate, they are also required by law not to let their customers have loans out more than 12 weeks as a maximum. In general though, the average payday loan fee is less than $20.00 for loans of $100.00. $20.00 simply is not an "outrageous fee" to get a little money in a hurry.

In my line of work, I occasionally will look over bank statements with my customers who are frustrated with their bank of choice. I had one customer whose account had a transaction put her available balance at -$1.17. The bank then charged her a $35.00 overdraft fee. Her account was now at -$36.17. The bank then did a complimentary overdraft protection transfer from her credit card account of $40.00 to put her back into the positive. However, by transferring the $40.00 from her credit card account, it caused that account to be over limit. She was then charged a $39.00 over limit fee on her credit card account. Essentially, she just borrowed $1.17, and her fees added up to $74.00, and her bank account was at $3.83, essentially ensuring future overdraft charges, unless she could wait until payday without needing any more money.

I showed her how a payday loan could have saved her quite a bit of money and stress. Let's say she borrowed $100.00 at a cost of $20.00 until her payday, and deposited that $100.00 in her account before the above item was presented. Her account would be at $98.83, giving her some breathing room until payday. It is obvious, how in this case, a payday loan is the better choice. Additionally, it is obvious, what her bank (which does not have to give an APR on its fees) would prefer her to do. While this is just one specific example, I see similar scenarios every single day.

Banks charging outrageous fees, while claiming they are doing it with the customer's best interest as their goal. If the critics want to talk about companies preying on the poor and uneducated, then they need to put banks and credit unions on the top of their lists. It would seem that those who use a payday loan appropriately are acting more educated about their finances than those who let their banks handle their finances for them. Also, if it were true that payday loan companies put "people on the fast track to financial ruin," as one critic said, how is it, that they stay in business?

The idea of a cycle of debt is misleading. You either are going further into debt or climbing out of it. If a payday loan company was putting people more into debt, eventually they would run out of customers, as customers run out of money. And a company without a customer base will not be in business long. The number of successful payday loan companies that we see would indicate, as they claim, that a majority of their customers pay off their payday loans within a week or two, and move on.

Maybe it's time for the critics of payday loan companies, to acknowledge that some of their attacks are unfounded. We should be educating people that a payday loan is an available and better option when it comes to their finances, rather than trying to shut them down. By trying to limit their financial options, you are not doing them any favors; you simply leave them no choice but to pay, in most cases, a higher amount in fees by using overdraft protection. There is a reason that so many people choose payday lending over other alternatives, and that reason is that it is a less expensive, less stressful way to go.

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