One of the ways to avoid taking out a payday loan that some opponents cite is the idea of using overdraft protection. Overdraft protection is a way for your bank to pay a check that doesn’t actually have enough money in your account to cover. It’s important to understand exactly how overdraft protection works if you want to decide whether it’s a viable alternative to a payday loan.
Overview of Overdraft Protection
A check, or a “draft” to your checking account usually must be paid from funds within your account. If you have $50 in the bank and you write a check for $100, that check will usually bounce.
With overdraft protection, the bank doesn’t bounce your check, however. They pay the difference – in this case, a difference of $50 – and then charge it to your account. You still have to pay the extra $50, of course, as well as a fee.
There are usually limits as to how much the bank will cover in overdraft protection. Usually it’s a matter of a few hundred dollars. Chances are pretty good, too, if you use your overdraft protection often enough, they may stop letting you use it.
How Much are Overdraft Fees?
That’s the real question. The fees involved in overdrafting a check are less than the combined fees you’d pay to the merchant and the bank together if you bounced a check. However, there’s still a fee.
Typically, the fee for an overdraft will be between $25 and $40, depending on your bank and where you live. Some states set limits on the amount that a bank can charge.
Is it worth it?
When compared to a payday loan, overdraft protection can make sense. If you borrow $400 with a $50 fee from the payday lender, you can just as easily write a check for $400 over your bank account and only pay a $25 fee. The key is making sure there is just a single overdraft. If you wind up with multiple charges, you’re talking about a significantly different situation.