ThinkBlog : The ThinkCash Blog

The FDIC just released a new study of bank overdraft programs. The study confirms what our customers already know - bank overdraft loans are almost always more expensive than short term loans from companies like PayDay One and ThinkCash. In fact, the study calculated that the APR on a typical overdraft transaction can be 3,520 percent or higher. To make matters worse, over half of the large banks surveyed process overdraft transactions from largest to smallest, which maximizes the number of overdraft fees incurred by customers.

As we’ve pointed out before, if all bank overdraft loans were replaced with short term loans, American consumers would save over $10 billion per year in fees. Since most banks automatically enroll all checking account customers in their overdraft program, it’s important that consumers understand that there are often other, less costly options available. For example:

• Many banks allow customers to link their checking account to a savings or investment account so that when overdrafts occur, funds are automatically transferred from another account with minimal or no fees.
• Some banks allow customers to establish an overdraft line of credit, which is usually far less costly than standard overdraft programs.
• If these programs are not available, customers should compare the cost of their bank’s overdraft program with other short term loan products such as payday loans and installment loans. In most cases, these loans will be less costly than bank overdraft programs.

Unfortunately, current regulations don’t require banks to disclose the effective APR of overdraft loans, making it difficult for consumers to compare their options. Whenever a consumer faces a cash crunch, we encourage them to determine exactly how much money they need to make ends meet and how many days they’ll need to repay borrowed funds. Then, the consumer can request an exact cost from each bank or loan provider to determine the best option.