Payday loans have been under the microscope of opponents in the recent past. Over the years these short-term personal loans that have to be paid back by the borrowers’ next payday have been growing in popularity. Presently, billions of dollars in loans have been issued to fast cash consumers over the last few years. However, opponents of payday advances question the idea of payday loans. They believe that paydays are not in the interest of consumers. But recent studies have refuted this perspective.
Researchers from East Carolina University’s Department of Economics published a comprehensive comparison analysis of the most common interest rates of cash advance payday loans to fee charges by bank overdraft services. The study compared the two by classifying overdraft protection as a form of a short-term personal loan. In the current atmosphere of payday loan criticism, the study’s findings are even more significant.
The study’s abstract supports the views of payday lenders:
Payday lending attracts attention for its high interest rates, but [check] bounce protection loans are much more expensive. Bounce protection is a program where consumers overdraft – write checks in excess of the checking account balance – and the bank pays the check allowing the account balance to be negative. For this service/loan, banks charge the standard non-sufficient funds (NSF) fee. When the amount borrowed is low and the time outstanding is short, the effective interest rate paid on this loan can be quite high. Using a unique data set we are able to quantify how high the interest rate is. We find that the median implicit interest paid by consumers is over 4,000%.
Also, the study’s conclusions were startling in that the rates of payday fast cash loans were twenty times lower than the overdraft fees from traditional financial institutions like banks and credit unions. It seems that once again traditional banks escape scrutiny while the activities of payday lenders are scrutinized. Many times payday loans attract attention due to their interest rates, but overdraft protection loans are far more expensive. Unsuspecting consumers are not made aware of the high cost of overdraft fees; the effective interest rate paid on these loans can be quite high.
It is not uncommon for banks and credit unions to charge their customers who occasionally bounce checks, 6,000 percent interest rates. The customers that overdraft their accounts frequently can pay more than $3,000 in annual fees and penalties. In an astonishing example, a bank required one customer to pay an interest rate of over 260,000 percent for a meager $3 overdraft left remaining for a one day. This latest study only supports the arguments of nationwide payday loan stores and lenders that the alternatives to payday loans are more expensive for consumers.