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If you haven’t seen it already, the Today Show aired a short segment on the industry highlighting two customer experiences with our product. Finally—a story that offers the perspective of a borrower who said “for me, it works well.” And that’s exactly why products like ours are one of many options to consumers.
There was a bit about credit card cash advances and overdraft being “cheaper” than payday advances. But, are they?
A report by the FDIC concluded that bank and credit union overdraft fees carry APRs ranging from 1,067 to 3,520 percent. In addition, a recent Pew Center study concluded that if an overdraft was treated like a short-term loan with a repayment period of seven days, the APR for a typical incidence would be well over 5,000 percent.
Also, a Federal Reserve Bank of New York staff report, “Price-Increasing Competition: The Curious Case of Overdraft versus Deferred Deposit Credit” finds that that deferred deposit credit, payday loans, and overdraft protection compete directly for market share in the short-term credit market, an $80 billion dollar market. The report found that payday advances are a cheaper alternative to cover small-denominations and “when deferred deposit credit [payday loan] priced per dollar borrowed is available, depositors prone to small overdrafts switch to that option.”
Wonder if the Today Show got their hands on these studies?
I believe that what Jean Chatsky actually said was that the overdraft protection offered by your bank was cheaper than a payday loan – not that overdraft charges themselves were cheaper. Makes a difference.
Not only can overdraft protection be more expensive than a payday advance, she was also mistaken in thinking that the APR of a payday loan is tremendously important. The importance of a loan’s APR is directly proportional to the term of the loan, which is to say the APR of a 30-year home loan is 780 times more important, for a consumer, than the APR of a two-week payday advance – simply because the loan is in effect for that much more time. Even if a payday advance is rolled over 4 times and you consider it to be a 10-week loan (which it isn’t because the lender incurs more costs with every rollover) the APR is still only 1/156th as important as the APR of a 30-year home loan [(30 x 52) / 10]. This is the big mistake which all of the critics are making, and why usury interest rate caps are invariably counterproductive.