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Are payday loans better than overdraft fees?

If you can pay it off quickly, a payday loan may be the way to go. Be careful, though.

By MSN Money Partner Sep 2, 2011 2:55PM

This post comes from Matt Brownell at partner site MainStreet.


MainStreet on MSN MoneyIf you're in the habit of running out of money and bouncing checks, a new study suggests that you might be better off going to a payday lender.


The study from Moebs $ervices, an economic research firm, found that consumers who bounce a check get hit, on average, with a $28 non-sufficient funds fee by their bank. That's compounded by an average $30 penalty assessed by many retailers. Some banks let you avoid the embarrassment of a bounced check by offering an overdraft service, but the study found that those cost you an average of $34 per check.


Overdraft fees differ a bit from institution to institution; according to our sister site RateWatch, credit unions tend to be a bit more lenient, charging check-bouncers an average of $27 versus $31.17 at banks. But either way you cut it, consumers who try to spend more money than they have wind up paying dearly for it, and the report estimates that approximately 34 million people bounce checks more than 10 times a year.


So what's your alternative if payday is a few days away and the cash in your checking account doesn't cover the purchase you want to make? Credit cards are, of course, the weapon of choice for consumers who want to spend more money than they have. But for those who don’t qualify for a credit card, there's an alternative: payday loans.


"Payday lenders can provide a good alternative source," says Mike Moebs, the firm's CEO. "The small loan market … is driven by people who don’t have FICO scores high enough for a credit card."


So are payday loans really a good deal?


Like any high-interest loan, it depends on how quickly you pay it off. Moebs points to the example of someone with $500 in the bank who needs to make a $700 purchase. A $200 loan at 17.5% per pay cycle means an extra $35 on top of the $700, provided you pay it off as soon as the next paycheck comes. If the alternative is bouncing a check and losing more than $50 between the bank and the merchant, clearly the payday loan is your better bet. Post continues after video.

With that said, most payday borrowers aren't quite so responsible. Moebs says that the average payday loan is a little under $500, and gets paid off in 3.1 pay cycles, which means that the interest will build up quite a bit more. And a study conducted earlier this year by a consumer watchdog group found that payday lending often led people to long-term debt problems.


So if you need a small loan to get you to payday and you're confident you can pay it off in time, a payday loan beats bouncing a check if you can pay the loan quickly. Just be careful.


More on MainStreet and MSN Money:



Sep 5, 2011 10:25AM
America's doing great see the kind of choices a lot of us have:

 payday loans or bouncing checks

Meanwhile the rich guys are doing ok

Median CEO pay in 2010 was $9.0 million, based on 158 Standard & Poors 500 index companies

Republicans don't want to raise tax rates on the rich guys while 34 million Americans can't get through the year without bouncing more than 10 checks.....something should change.....maybe it's who we vote into government to work for us.......

Sep 3, 2011 11:17AM
Having been in a situation where I needed to rely on payday loans for a short time, you have missed the point. If you have a marginal income, you cannot afford to pay the principal & interest off by the next payday. If the  interest were lower than the 400% APR at the time & there were more time to pay, it might have been an ok alternative that both got me out of a mess & helped me get on track. As it was, it was very easy to get in  cycle that was a hard to break. Fortunate, I am out of that now but strongly feel there is a need to have some reasonable loan alternatives for people in a bind.
Jan 4, 2013 2:13PM

My bank's overdraft fee is $20. In the past, if I ever fell short, I would go to my bank's ATM (no fee for the use of it) and withdraw the amount that I will need to get me to my next payday. That is a lower fee than any payday loan center.  It helps, too, to pay bills in cash or moneyorder.

Sep 6, 2011 1:47PM
Forget payday lenders; they're insignificant compared to the lending practices of the massive Wall Street oligarchs that destroyed the economy, raided the treasury and deceived the American taxpayers that bailed them out.
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