Watch Out for Abusive Overdraft Loans (Overdraft Charges)
Ever bounced a check or made a debit card purchase that caused your bank account to go into the red?
If so, you may have been given an abusive overdraft loan without even realizing it.
If you're struggling to make ends meet because of abusive overdraft loans, talk to a bankruptcy lawyer about your options.
Fill out the below form to get started then read on for more overdraft loan information.
What is an Abusive Overdraft Loan?
According to the Center for Responsible Lending (CRL), 69% of overdraft fees charged by banks can be considered "abusive" and such charges cost consumers billions every year. The question is how are banks getting away with charging such exorbitant amounts?
The answer may be simpler than you think.
Once upon a time, most banks charged their customers fees for overdrawing their accounts.
Such fees were known as "not-sufficient funds" (NSF) charges and were used to deter people from spending money they didn't have. Today, though, most NSF charges have been replaced by abusive overdraft loans, but many consumers aren't aware of the switch.
- Abusive Overdraft Loan: a high-interest, small dollar amount loan made by a bank or credit institution to a customer whose account has gone negative.
Your bank may call these loans "bounce protection," "overdraft charges," or refer to them as a protective "service" for your benefit. Many banks offer such loans automatically in their account terms and they may not alert customers about other, less costly ways to protect themselves from overdrafts.
How Do Abusive Overdraft Loans Work?
Here's the situation: you're at the ATM, using your debit card or writing a check. You don't have enough money in your account to cover the transaction, but instead of alerting you to this fact and offering you the chance to cancel the transaction, your bank allows it to go through.
Of course the bank "covers" you, but only at a cost: the average purchase that leads to an abusive overdraft loan totals $27 and the average debit card purchase that leads to such loans is only $17. The average abusive overdraft loan, though, is a whopping $34!
This means that every dollar a bank "lends" you for overdrawing your account costs you from $1.26 to $1.94 in fees!
Abusive Overdraft Loans: Income Generators for Banks
Many people see a one-time $34 dollar charge and pay it rather than go through the hassle of contesting the charge. This ultimately works in the bank's favor, because customers generally pay their fees soon after they're incurred, which amounts to money from a short-term, high interest loan in the bank's coffers.
In 2005, banks earned an estimated $10.3 billion in abusive overdraft loans; the following year, the total was up to $17.5 billion.
The truly shocking part is that banks only offered abusive overdraft loans to customers in the amount of $15.8 billion dollars – the overdraft "fees" cost more than the actual amounts loaned.
In fact, as recently as 2006, banks earned as much as 40% of their total income from abusive overdraft charges – that is, by lending people like you money you didn't ask for at prices you never dreamt of paying. Here's how.
Bank Facilitation of Abusive Overdraft Loans
Rather than charging customers the traditional NSF fee, many banks have opted for the abusive overdraft loan in recent years. In fact, banks have found ingenious ways to maximize the profits from abusive overdraft loans.
Manipulation of Withdrawals
Most banking institutions reserve the right to remove funds from an account in any order they choose.
Why?
Say you write a rent check in the evening, after making several smaller purchases with your debit card – groceries, lunch, coffee, etc. Your bank can opt to remove the largest amount first, thus maximizing the odds that you'll overdraw.
Even if you had enough money in your account for every purchase up until the last one, you could end up paying $34 overdraft fees – for every purchase that overdrew your account.
Manipulation of Checks
Bank regulations initiated in 2004 now mean that money from checks you write can be removed from your account more speedily than ever.
Manipulation of Deposits
Banks are legally permitted a certain amount of time to process your deposits, and they typically use that time, no matter whether or not they need it. After all, the longer it takes money to appear in your account, the more likely you are to overdraw and rack up fees.
What You Can Do to Protect Yourself
Though abusive overdraft loans are pervasive, they're not unavoidable. You have several measures of protecting yourself:
- Link your checking account to a savings account or credit card with a low interest rate. That way, any time you accidentally overdraw your account, you'll be covered at a known rate or by your own cash.
- When opening new accounts, ask about the institution's policy and read everything before signing it.
- When reviewing your statements, question any problematic processing you see – for example, if the bank removes money from your account in an order different from the one in which you made purchases.
- Think your bank is taking too long to put money in your account? Ask them to move more quickly. Sometimes, banks will change their standard procedure if you complain.
- Do some research. Some banks offer customers the option of receiving an alert if they're about to overdraw their account, and allow them to choose to cancel a transaction.
Stay Alert to Avoid Abusive Overdraft Loans
Think about it – 69% of banks use abusive overdraft loans, debit card usage is more prevalent than ever and the economy isn't in great shape.
Take the initiative to protect yourself against abusive overdraft loans today so you don't have to watch your hard-earned money trickle away in bank fees.
The above summary of abusive overdraft loans is by no means all-inclusive and is not legal advice. Speak to a your bank or an attorney in your area for further information.