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Unexpected expenses are a fact a life. Cars break down. Medical needs arise. Appliances stop running. But, when faced with an immediate need for cash, where do you turn?
Many hard working Americans chose to take out a payday loan, a small, unsecured, short-term cash advance that is usually repaid on the borrower’s next payday.
Customers typically take out a payday loan to cover small, often unexpected, expenses and to avoid costly bounced-check (hyperlink) and overdraft protection fees, late bill payment penalties, or other less desirable options.
Here’s how a payday loan works
- Payday loans are usually 2 week loans for an amount between $100 and $500. The typical fee is $15 per $100.
- The customer writes a post-dated check which is held for an agreed upon time period, usually about two weeks. On the agreed upon date, either the customer’s check is deposited or they return with cash to reclaim the check.
Without access to short-term credit such as payday advances consumers are forced to turn to much costlier options.
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| Overdraft Protection Fee on $100 Transaction |
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| Credit Card Late Fee on $100 Bill |
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| Bounced Check + NSF / Merchant Fee on $100 Transaction |
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| $100 Payday Advance |
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Overdraft fees can be nine times as much as payday loans, when stated as an APR. The FDIC reports that the average bank customer pays $27 (median overdraft fee) to cover a transaction of $36 (APR ranging from 1067% to 3520%), while payday lenders typically charge a flat fee of $15 per $100 borrowed (391% APR). (1)
Payday loan fees are fully disclosed before the customer enters the transaction, while overdraft fees are not. The majority of bank customers are automatically enrolled in overdraft protection. They are not aware that they are overdrawing their account and incurring fees until after the transaction.
The interest rate on bounced checks can total 4,547% APR—more than twenty times that of payday loans. (2) Bank charges for a bounced check average $30 and retailer fees for the same bounced check are typically an additional $25, although the charge can be higher. (3)
Unlike payday lenders, banks do not disclose the APR of bounced check fees. (4)
The fee for a late credit card payment is more than twice as costly as a payday loan fee: $100 credit card balance with a $37 late fee = 965% APR. (5)
In addition to interest or penalties for late payment of bills, late payment of utility bills can result in utilities being shut off. Reconnection of service can be costly: $100 utility bill with $46 late/reconnect fees = 1,203% APR.
These examples illustrate the range of reconnection fees: (6)
Phone (e.g., $12 to reconnect in Illinois);
Cable (e.g., $5 penalty per month in Virginia);
Natural gas (e.g., $78 to reconnect in Maryland);
Electric (e.g., $37.80 during the day or $73.83 at night, in North Carolina);
Water/sanitary services (e.g., $25 in Texas).
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