Overdraft Fees vs. Payday Loans

Overdraft Fees vs. Payday LoansThe Overdraft Fees vs. Payday Loans debate is a big one because it is often cited by payday lenders as the reason why you’d want to take advantage of their service. But is it really more beneficial to get a payday loan, rather than pay overdraft fees?

Banks seem to keep raising the amount they charge for overdraft fees, and they are getting less and less likely to reverse those charges. There was a time when if you could explain to the bank why you made the mistake, they would be lenient with you, but nowadays it seems like they are more willing to either split the fees with you, or sadly say there’s nothing they can do. That’s why it’s getting more and more important to try to avoid these fees, which has many people wondering whether payday loans can do the trick.

Overdraft Fees vs. Payday Loans: The Numbers

Here’s how it breaks down: For simplicity’s sake let’s say that your bank charges you $30 for an overdraft fee, even though most banks charge more for their NSF fees these days. Let’s also say that you find a payday lender that will loan to you at a rate of $15 per every $100 that you take out. Let’s also assume that you’ve been approved for up to $500. So a financial crisis hits you, and you realize that you’re going to bounce a few items in your checking account. You’re thinking that it would be a better idea to get a payday loan in order to avoid the overdraft charges.

Calculate the Number of Charges
Figuring out how many items are going to hit your account is a big step in determining whether a payday loan is a good idea or not. You also need to find out how much you are going to be overdrawn by, and what it’s going to take in order to make up the difference. Because NSF fees are so high you have some room to play with, but at some point you’re going to reach the spot where the fees from a payday loan are going to equal or trump the amount your bank is going to charge you.

In the example above, you can avoid a $30 overdraft fee with a $15 payday loan fee, but only if you’re only going to be overdrawn by $100 or less. If you have multiple overdraft fees, especially if you have several smaller transactions that will be going through, each generating their own overdraft fee, it make sense to get a payday loan to cover your account and avoid the charges. Let’s say you have five transactions coming through, which would total $150 or more in overdraft fees. Let’s say that these transactions only amount to $250. You get a $300 payday loan that comes with a $45 fee, and you’re saving roughly $105. In this scenario it makes sense.

Reality vs. Theory
So in theory, and with these very simplified numbers, you will save money by getting a payday loan. But the reality is that most people wind up stuck in the payday loan trap long after their account is back in the black. This is because the loan will be due on the next payday, and you might stand the chance of overdrawing your account again if you don’t reloan the money. So in some instances it would be better to pay the fees at the bank, and work things out with them so that you can clear up the account on your next payday and not have a loan to pay back.

Only on Small Amounts Does It Work
The only time this ever really make sense is if you limit the amount of your payday loan to around $100. Most people can afford to pay back $100 on their next payday, without falling into the payday loan trap. When you start to go higher, that’s when you are really playing with fire, and we’ve seen hundreds if not thousands of situations and scenarios where people took out more money than they really needed to fix the financial crisis, and ended up stuck for several months, even years, trying to pay back the initial loan.

Payday lenders make a pretty good case, but they will never bring up the fact that the vast majority of borrowers end up becoming habitual borrowers, and the high fees and rates get doubled, tripled, and more as time goes by.

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