How to compare a payday loan with a bank overdraft?

The Houston Chronicle (Dec 20 2008) reported that, according to M Fusaro of the Economics Department in East Carolina University who conducted a financial literacy survey, only a minority of adults knew that "if you overdraw your checking bank account (otherwise called ‘bouncing a check’) for $100, this is more expensive than taking out a payday loan."

It is so confusing. The banks have all this financial jargon, the media makes it out that payday loans are bad, then there are articles that say that payday loans are better than banks… who can you believe?

Get the full fee schedule from your bank and your payday loan provider if you are considering getting either a payday loan, a bank overdraft or a credit card cash advance. Then, make yourself a spreadsheet with different columns for interest rate, closing costs, appraisal fees, inspection fees and so on. Itemise each cost. If you want to be able to compare different loans, the amount you want to borrow and how long it will take you to pay off this loan must stay the same.

This is the only way you are going to be able to compare your options. You must, as they say, “compare apples with apples”.

What is NSF, overdraft and how does this compare with payday loan fees?

NSF, which stands for non-sufficient fees, are fees which you have to pay for a bounced check. There is a range for these fees but, at the time of writing, this was in the range of $25 to $30 (but readers are advised to undertake their own research to determine these fees).

Sometimes, you can easily make the mistake of balancing your checkbook incorrectly and spend more money than you thought you had in the bank.

If you write a check to pay for, let’s say, a bill, the billing company will eventually bank your check. If you don’t have enough money in the bank, your check will “bounce”. At this point, you have to pay for NSF. You will also be late for bill payment and may have to pay late fines. If you have a checking as well as savings accounts, your bank will take money you owe on that bounced check from your savings account (– this is known as an overdraft –) in order to pay your bill. If you have a checking account only, your bank may pay your bill for you first but you will have a negative balance on your checking account.

How much will you be out of pocket in these situations? If you have savings and checking accounts, you will have to pay NSF and bank overdraft fees. If you have only a checking account, you will have to pay NSF, bank overdraft fees and interest on the amount the bank paid on your behalf.

In these scenarios, it may be better if you took out a payday loan instead of bouncing a check. You may ask how this could be – aren’t payday loan financial charges more expensive than NSF and overdraft fees? No, the charges on a payday loan may be smaller than your NSF and overdraft fees. In addition, the other advantages of a payday loan are:-

1. Having a bounced check, overdraft and non-sufficient fees can ruin your credit history. Borrowing a payday loan does not affect your credit history.


2. With cash at hand from a payday loan, you can now pay your bills on time. Timely bill payments ensure a good credit record.


3. With a payday loan, you don’t have to worry about the possibility of a bounced check, NSF, overdraft fees and/or bank overdraft interest rates.