OK, you’ve been reading my bankruptcy blog, and now you know that one of the worst kinds of loan you can have is a payday loan. You’ve passed up every online offer of cash to “tide you over until payday”, and you’ve driven right by all the street signs advertising fast cash. But don’t relax your guard yet, because there’s another kind of everyday loan that needs a firm “No, thank you!” from you.
Banks call these loans “overdraft protection”, but a good name would be “bounce loans”, because they prevent your check from bouncing in the event you overdraw your account. Sounds great, doesn’t it? Actually, no. In fact, consumer groups have been investigating these loans lately, because they can turn out to be even worse than payday loans, with triple-digit interest rates and charges.
You go to your ATM for a cash withdrawal, or you’re using a debit card for a purchase. The problem starts when you withdraw more – or buy more – than the balance in your account. Even if you’ve gone over by just a dollar or two, banks have been charging penalty fees as high as $20 or even $35 per incident, plus $2 to $5 per day the account is overdrawn! An overdraft loan can be triggered by writing a check for more than your balance, but in practice, more than half of
bounce fees are triggered by debit cards or at an ATM. Many banks don’t have a warning system that tells you that you’ve gone over your limit, which is what the consumer groups are asking for. On a $100 overdraft, with a $20 fee and two weeks’ time until a deposit brings the account back to a positive balance, the APR (annualized interest rate) would be a whopping 520%!
As a bankruptcy attorney in Indiana for almost twenty five years, I work with people who have real financial problems. Most of these families or individuals are driven to the point of bankruptcy by some combination of factors that are mostly beyond their control, big things, such as extended illness, job loss, or divorce problems. I just hate to see situations made worse by debts that could have been avoided. Bounce loans would certainly be near the top of that list!