New Study Finds 4,547% Interest Rates on Bounce Protection Loans
WASHINGTON, DC – The median interest rate on bounce protection loans is in excess of twenty times that of payday loans concludes a study by Mark A. Fusaro, Department of Economics, East Carolina University.
The independent study, “Hidden Consumer Loans: An Analysis of Implicit Interest Rates on Bounced Checks,” finds that “Payday lending attracts attention for its high interest rates, but bounce protection loans are much more expensive. When the amount borrowed is low and the time outstanding is short, the effective interest rate paid on this loan can be quite high.”
Fusaro found that “frequent overdrafters can pay fees exceeding $3,000 per year which implies an interest rate in excess of 1,700%. The median implicit interest rate is calculated to be 4,547%. People over 70 years old pay a median interest rate in excess of 7,000%, the most of any sub-group examined.”
Using an extreme example, Fusaro writes, “A person who has a three dollar overdraft that is outstanding for one day pays an implicit interest rate of 260,245%.”
Additional findings include:
• People of all income levels overdraft equally often
• Customers using bounced checks as personal loans account for twenty percent of overdrafts
• Service charges are a profitable income source for banks
• When a bank pays overdrafts, customers overdraft 50% more
“This study proves the wisdom of our customers. For as long as we’ve been in business, customers have told us they use our service to avoid bounced check or overdraft protection fees. Payday lending exists simply because we offer people a better alternative,” said D. Lynn DeVault, president of the Community Financial Services Association of America (CFSA). “Lawmakers take heed: If you take away the option of payday advances, your constituents will be left to choose between less desirable alternatives,” DeVault added.
Fusaro examined 1,399 bank account transaction records from a small bank in the Midwest. The average account holder was 47 years old and had an annual income of $31,600. Fusaro grouped accounts into four categories, from “occasional” overdrafters (less than 10 times per year) to “chronic” overdrafters (100 or more overdrafts per year). Using the data set of checking accounts, the author calculates the implicit interest rate implied by the fixed fee, the amount of the overdraft, and the length of time the overdraft is outstanding.
Highlights available at: http://www.cfsa.net/OverdraftProtection.html
Full study is available at: http://personal.ecu.edu/fusarom/fusarobpinterestrates.pdf
About the Community Financial Services Association of America
The Community Financial Services Association of America (CFSA) is the only national organization dedicated solely to promoting responsible regulation of the payday advance industry and consumer protections through CFSA’s Best Practices. As such, we are committed to working with policymakers, consumer advocates and CFSA member companies to ensure that the payday advance is a safe and viable credit option for consumers.
