Month: August 2020

Sometimes, regulators and politicians just can’t seem to keep their hands off an industry. The payday loan industry, for example, is a favorite target of many folks. Just about every state has passed some form of legislation to regulate the payday loan businesses, although the amount of regulation can vary greatly from one state to the next.

Arizona’s Attorney General, for example, has gone after payday lenders on many occasions. There are other states, such as Illinois, that have passed a number of different measures aimed at shutting down payday lenders. Another state to recently pass payday loan restrictions was the state of Wisconsin. It seems like everywhere you turn, there are state politicians and legislators that want to put the screws to the payday loan industry.

There is even a federal law that dictates how payday lenders can loan to military personnel. The federal legislation aims to prevent abuse of military families by limiting the interest rate that the lenders can charge on a payday loan to those folks.

The latest state to take a stab at the often-controversial payday loan industry is Colorado. The Colorado House recently passed a measure onto that state’s Senate for consideration.

Currently, the maximum annual percentage rate that a lender of any type can charge in that state is 300 percent. The new legislation would dramatically reduce that rate down to an annual rate of just 45 percent.

According to the Attorney General in the state of Colorado, the average borrower of a payday loan renews and refinances that loan a total of five times before they pay off the original amount. That works out to be a hefty sum. In the year 2009, the average payday loan borrower in Colorado borrowed about $336.97, and paid a whopping $475.73 in interest on that loan.

Needless to say, those in the payday loan industry are carefully watching what’s happening in Colorado to see whether or not the legislation makes it any further.

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.