Making Ends Meet: Pay An Overdraft Fee Or Float A 2-Week Payday Loan?

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LAKE BLUFF, Ill. – A new study raises an important question for cash-strapped credit union members: is it more economical to pay the fee for overdrawing a savings account or taking out a small short-term, or payday, loan?

Moebs Services, which collects data from more than 2,000 financial institutions, 1,100 of them credit unions, asserts that consumers who are frequent users of overdraft fees at banks and credit unions could save money by bridging their cash gap with a 14- day payday advance loan, rather than paying checking account OD fees.

“The average amount overdrawn on checking accounts by about 70% of consumers, according to the General Accounting Office and the FDIC, is less than $100,” said Michael Moebs, economist and CEO of Moebs Services. “Consumers who use a payday advance loan for $100 or less will pay an average of $17.97, which is 33% less than the $27.01 it costs for an overdraft of that same amount from a checking account,” he explained. “For consumers who struggle to meet their financial obligations, the savings between the two is significant.”

Moebs recommends that credit unions and banks lower their overdraft charges to $20 to make the fees more economical than a payday loan. “Based on these study findings, we believe that banks and credit unions should consider reducing their overdraft fees to less than $20,” said Moebs. He asserted that credit unions and banks can make up the lost revenue on lower fees by increasing the volume of their overdraft transactions.

According to Moebs, there are 19 million consumers who use payday lenders, compared to 13 million consumers who frequently use overdrafts.

“Since a checking account is required to qualify for a payday loan, banks and credit unions already have these consumers as customers or members,” said Moebs. “If banks and credit unions lowered their overdraft fees and reached out to consumers who are frequent users of payday loans, more consumers would opt to use the overdraft services of their financial institution. This would secure future brand loyalty, and be a good source of additional revenue.”

Release of the study comes as the next deadline is looming, Aug. 15, for credit unions and banks to implement amendments to the Federal Reserve’s Reg E, Electronic Funds Transfer Act, which will require that all existing and new customers opt-in for overdraft protection programs. A July 1 deadline required opt-in for all new accounts.

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