A new federal report has detailed reasons why payday lending is a financial horror that traps people in a cycle of high-interest debt.
For most people, I would guess that seems like old news - not because The Post and Courier carried a story about the report March 26, but because it's been reported repeatedly, for years, that payday loan customers tend to take out loan after loan and end up paying interest rates expressed in hundreds of percents.
So, I would venture that most people already regard payday loans as a costly, desperate measure. But surprisingly, the mainstream cousin of payday loans seems to get a pass in terms of financial respectability.
That would be the checking account overdraft coverage offered by many banks and credit unions.
People who wouldn't be caught dead taking out a payday loan might not think twice about overdrafts, but in important ways they are quite similar.
Like a payday loan, overdrafts allow people to spend money they don't have on hand, at exorbitant cost. And like payday loans, overdrafts essentially can be very expensive short-term loans.
Indeed, the payday loan industry argues that its products are less expensive than overdraft fees, which can cost $35 no matter how small the overdraft.
"Used correctly and for the right purpose, cash advance loan and payday loan programs can prove to be much more economical, convenient, and efficient," says a statement from the Payday Loans Organization.
Well, OK, but that's like saying that getting a ticket for an expired parking meter is more economical than getting a more expensive ticket for parking too long in a residential neighborhood in downtown Charleston. Being "less-worse" doesn't make something good.
Paying a $35 overdraft fee because you didn't realize you had insufficient funds in your checking account when you used your debit card to buy gas or a cup of coffee is a pretty bad deal. That doesn't mean that paying $15 per $100 to borrow money for a week or two is a good deal.
The good news is, people don't have to allow overdraft services to be attached to their checking accounts. In fact, since 2010, people have had to opt-in, or give permission, to have overdraft features on their accounts.
So, if your checking account has an overdraft feature, you can have it removed.
An overdraft can occur when a person uses a debit card to make a purchase or ATM withdrawal without sufficient funds in their checking account to cover the amount. Overdraft fees typically come from either an arrangement where the bank will transfer money from one account to another to cover the shortage, or one where the bank will, at its discretion, use its funds to temporarily cover the shortfall.
For example, Wells Fargo bank offers "debit card overdraft service" under which the bank explains: "Your ATM and everyday debit card transactions may be approved - at our discretion - if you don't have enough money in your checking account or accounts linked for Overdraft Protection."
Under that service, the fee for each overdraft item, such as a debit card purchase or ATM withdrawal, is $35, and up to four such fees can be charged in a single day.
If a person had such a feature attached to their checking account and didn't realize they had insufficient funds, they could easily rack up $140 in fees in a single day. But not to pick on Wells Fargo. At South Carolina Federal Credit Union, "there is no limit on the total fees that can be charged when you overdraw your account" with their "Courtesy Pay" service, which also has a $35 fee.
Those institutions and others also offer what they call overdraft protection, under which they will typically transfer funds to an overdrawn checking account from another account controlled by the same person, such as a savings account or credit card. Fees I have seen range from $2 to $12.50.
One problem that people can have is, with debit cards, automated payments and direct withdrawals from checking accounts, it can be harder these days for people to keep track of what's in their checking account.
And like payday loans, overdrafts can snowball into additional problems. A 2013 Consumer Financial Protection Bureau study found that people who had at least one overdraft or nonsufficient funds fee in 2011 paid an average of $225 in annual fees.
Reach David Slade at 937-5552