Why Bank Overdrafts May Be a Bad Deal For You

Many banks actively encourage their clients with low balances to overdraw their accounts. That means, if the customer writes a check or uses her debit card and has insufficient funds in the account, the bank clears the check by granting a temporary overdraft (a short-term loan), up to a specific limit. The customer is saved from the problems of bounced checks or interrupted shopping sprees.

Sounds like a good deal for the customers, right? That's what the banks say. They claim overdrafts are an added convenience to customers.

The truth is, they're often a very bad deal for the customers. Here's why.

When a bank grants a regular line of credit, the interest charged may be up to say, 20% or so. However, for overdrafts, banks don't charge interest -- they charge a flat fee on each transaction. This fee does not depend on the value of the transaction.

Let's see how that works. Overdraft plans fees may be as high as $35 per check. We'll assume a more conservative fee of $20 per check. If you have four checks totaling $200 that have insufficient funds against them and the bank automatically activates the overdraft and clears those checks, you will owe $80 in overdraft charges.

Unlike revolving lines of credit which you can repay at your convenience, an overdraft has to be settled in just a few days. Let's say the bank allows you to run the overdraft for 14 days.

A loan of $200 for 14 days incurring charges of $80 translates into an Annual Percentage Rate (APR) of 1043%!

A "convenience" for customers? Not at these rates.

What does this remind you of? It reminds me of payday loans and cash advances. Those are the other forms of lending which charge you such sky-high APRs. In fact, if you choose to repay a cash advance on due date and not roll it over, you'll likely be charged far less than what the banks charge you for an overdraft.

It gets even worse. Banks have software that ensures that your largest value checks and debits get processed first. There may be some logic to that. However, this arrangement also means that when there are insufficient funds in your account, instead of paying one overdraft charge on one large check, you pay several charges on several smaller checks!

Plus, most customers don't even realize that they are overdrawn until the bank notifies them about it.

Consumer advocates say that banks are perfectly aware that many people barely make it from payday to payday. These customers typically have very low balances. Rather than offer them a service that would be in their interests, banks extract high fees from them to cover bounced checks.

If you are caught short between paychecks, consider arranging funds from other sources rather than turn to overdraft protection. The best solution to the problem is to systematically build up cash balances so that you don't face such a situation in the first place.

About the Author

Prakash Menon is a financial expert and writer specializing in managing personal debt and providing wealth building solutions. He has written on signature loans, personal debt management and other topics.

---

Short Term Loans...are they right for you?

With less than a week before she was to receive her next paycheck, Roni was faced with a problem that millions of Americans experience at some point... Read More

Loans For Unemployed - Employing Home For A Solution To Unemployment

If the statistics for the quarter ended April 2005 are to be believed, about 1,96,000 people were added to the list of people unemployed that brought the... Read More

Understanding Personal Loans, Cash Advances and Payday Loans

Have you ever been short on cash? Has an unforeseen event emptied out your wallet? Are you short on funds in-between paychecks? I am sure that many... Read More

Finding A Thin Credit Or No Credit Motorcycle Loan

It is no secret that thin or no credit can hurt just like bad credit when shopping for motorcycle loans. The main reason for this is that... Read More

A Brief Look at Homeowner Loans

Homeowner loans are useful ways to get the things that you need? a loan based on the value of your house, yours to use in whichever way... Read More

What are Home Improvement Loans?

Home improvement loans are loans specifically designed by loans companies to help you fund an essential home improvement projects.Home improvement loans provided by loans companies are secured... Read More

Secured Holiday Loans- Your Chance To Unwind Your Senses

"All work and no play makes jack a dull boy".The phrase sounds more as a cliché, having been used innumerable times right from the time it was... Read More

What is a Bridging Loan?

A bridging loan as the name implies is a loan used to "bridge" the financial gap between monies required for your new property completion prior to your... Read More

No Income Verification Loans ? When Income Doesnt Show on Paychecks

Financial statements, salaries, income proof, documents, paycheck, W-2 forms, 1099's - there is an exhaustive list of some of the forms that you may require to provide... Read More

What is Bad Credit UK?

Bad credit UK is a term that many people don't fully understand. After all, credit itself can sometimes be difficult to understand? adding the description of "bad"... Read More

High Risk Personal Loans ? Revive Frustrated Loan Hunting Attempts with High Risk Loans

Bad credit seems like an unfinished business, you can't shake it off, and you can't move on without putting it away. Unfinished business is meant to be... Read More

Need a Personal Loan? Have Poor Credit? See if a Payday Loan Would Work For Your Needs

Poor credit and a financial emergency don't seem to mix well. However, a payday loan may work for you. Since online payday loan companies do not require... Read More

Faxless Payday & Cash Advance Loans - Fast Cash, No Faxing Loans, The Easiest Payday Loan Process

If you are in a hurry for a payday loan, the last thing you want to have to do is fax in your documents of verification. That's... Read More

Are You Ready for Your Students Student Loans?

Your son or daughter is a high school senior and your worried about the coming year, and more importantly, the coming student loans? College has become so... Read More

Auto Loans: Top 5 Tips For The Best Rate

You've got your eye on that shiny new Lexus - okay, maybe it's a Kia, but it's perfect and you want it to be yours, all yours... Read More

Loan Officer Marketing - The Power of Positioning

How do you build a marketing strategy that can have real estate agents hunting for your services? Realtors® are bombarded everyday with a continuous stream of marketing... Read More

Online Loans Made Easy

What will it take for you to get a low interest, low payment loan? The answer to that question could be an online loan from one of... Read More

Bad Credit Secured Personal Loans are Like Desserts-Last Course/Best Recourse for Impaired Credit

Plato said, 'We can easily forgive a child who is afraid of the dark. But real tragedy of life is when men are afraid of the light'.Are... Read More

Traditional Banks Vs Online Loan Companies

In recent years obtaining loans online has become a new and somewhat unknown reality. Years ago one would make appointments with their bank lenders and obtain loans... Read More

How to Finance a Small Business

Confused by how to finance a small business? One key to a successful business start-up and expansion is your ability to obtain and secure appropriate financing.Raising capital... Read More

Christmas Loans ? A Gift on the Occasion of Christmas

It is still a few weeks to Christmas and every one is already up with demands. Little Mary, ever eager to add to her collection of dolls,... Read More

How to Find a Cheap Debt Consolidation Loan

If you're shopping around for a cheap debt consolidation loan, then you're going to want to try to find the one that has the lowest interest rate... Read More

What is a Homeowner Loan?

A Homeowner Loan is a way of using the equity tied up in your property to raise money. Equity is the difference between the value of your... Read More

Getting the Best Auto Loan Rates

Getting a good auto loan rate is not luck, but rather a skill that you must learn. There are good auto loan rates available if you know... Read More

Shopping for a Payday Loan

You wouldn't consider buying a new pair of shoes, a bicycle helmet, or an extra pair of jeans without trying them on first to make certain they... Read More

Student Loans Are The Life Preserver Of The Education System

A loan is the reason many students are able to go to college and not have to worry about money until after they've graduated. There is a... Read More