How's this for loan terms? You borrow $100 for two weeks and you're charged an annual interest rate of 884 percent.
No, this isn't a payday loan.
This is basically the deal you get from banks and credit unions when they give you a short-term loan to cover an overdrawn account.
A few years ago lenders would return a check or deny an electronic transaction if you didn't have enough money in your account. Now they make an overdraft loan -- often without your consent -- and charge a hefty fee averaging $34, according to a recent study by the Center for Responsible Lending. This is sometimes called a courtesy overdraft-protection plan.
Overdraft loan fees now reach $17.5 billion a year, the study found. That's $1.7 billion more than the amount borrowed.
The American Bankers Association says overdraft loans help consumers avoid the embarrassment, inconvenience and merchant fees from a bounced check. And the group adds that it's in the consumers' hands to avoid penalties.
On that last point the banking group is right. It is possible to avoid overdraft loan fees. Banks and credit unions might not always make it easy. The Center for Responsible Lending reveals banking practices that can increase overdrafts. But a diligent consumer can sidestep this quagmire.
One of the first steps is to find out if your financial institution offers overdraft loans, and opt out if it does, says Eric Halperin, director of the Center for Responsible Lending's Washington office. "If they can't, they should find a bank that doesn't have an overdraft [loan] program," he says.
Or, see if your lender will allow you to link your checking account to a savings account or credit card, says Jean Ann Fox, director of consumer protection for the Consumer Federation of America. This way, if you overdraw, the money will be taken from savings or applied to your card. You'll pay a fee. Plus, you'll owe interest with the credit card.
"But when you cover an overdraft with your own money instead of the bank's money, it tends to be somewhat less expensive," Fox says. For instance, banks typically charge $10 to move money out of savings to checking. "That's better than $34," she says.
You also can apply for an overdraft line of credit, typically in the amount of $500 or $1,000, that will cover a shortfall if you overdraw your account, Fox says. You'll pay interest when you use the line of credit, usually at an annual rate of 18 percent, and may be charged an annual fee. Still, the cost is likely to be less than an overdraft loan.
Carefully track every penny coming in and going out of your account. That means writing down every check you write, every fee you pay and every ATM withdrawal and debit-card purchase you make "so you know the real balance," Fox says.
You can't rely on balances posted online or at the ATM, she warns. Those balances might not reflect paper checks you wrote but haven't landed at the bank yet.
Also, have your paychecks directly deposited to your account so you get access to your funds faster, Fox suggests.
Avoid using a debit card for small purchases if your account doesn't have much cushion. The bank might not give you any warning that you're overdrawn. So you could be socked with a $34 fee for every $2 cup of coffee or slice of pizza you buy with your debit card.
"You'll pay more in fees than you borrowed from the bank," Fox says. Use cash instead.
Questions? Comments? Write personal.finance@baltsun.com
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