Payday rates better than overdraft fees

March 7, 2007 

They sometimes charge customers an annual percentage rate of 1,040 percent.

Of course they need to be run out of town.

I'm talking about banks, not the frequently vilified payday lenders.

According to the Consumer Federation of America and The (Columbia) State newspaper, if someone overdrafts an account by $100 and has to pay a fee to the bank and the merchant within a two-week period, which is typical of payday loans, it could amount to a 1,040 APR.

And to think, the S.C. General Assembly, like a growing number of legislative bodies, is up in arms because payday lenders charge customers up to a 390 percent APR.

Legitimate banks allow you to buy a $2 candy bar with your debit card but don't tell you your account has already been overdrawn. And they charge you $20 to $35 for that purchase - even though they can simply decide to not let you make it.

Also, overdraft charges, through bank debit cards, average about $34, according to the Center for Responsible Lending.

People pay an average of $2.17 for every dollar borrowed through such "loans." That's the equivalent of paying $217 for every $100 of mistakes you make while balancing your checkbook.

Legitimate banks charge you for using someone else's ATM to retrieve your own money.

Legitimate banks sometimes raise the interest rate on Credit Card A if you make a late payment on Credit Card B.

Legitimate banks camp out on college campuses and target freshmen who don't have the knowledge or discipline to handle responsibly, let alone the bank account.

There is hardly ever much good said about payday lenders, and South Carolina is home to the largest. But this is from a report by the Federal Reserve Bank of New York:

"Using a small set of data, we find that payday loan rates and fees decline significantly as the number of payday lenders and pawnshops increase. Despite their alleged naivete, payday borrowers appear sophisticated enough to shop for lower prices. ... The simple fact that payday lenders have triumphed over pawnshops suggests that payday lending raises household welfare by providing a preferable alternative."

If you make unwise financial decisions or mistakes or get caught in an emergency, most financial institutions will charge you dearly.

Not just payday lenders.

ONLINE | For past columns and to read Bailey's blog, go to MyrtleBeachOnline.com.

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