Due to the recent Overdraft Fee Legislation, on Wednesday, March 09, 2010,

Bank of America announced that they will eliminate overdraft protection fees

for those who do not explicitly choose the option, effective June 2010 for new customers and August 2010 for current debit-card holders.  What will happen is that a customer’s transaction will be denied at checkout if there is insufficient funds in their account instead of incurring a fee, usually around $30, for each overdraft occurrence.  Compared to a payday loan which charges a one time fee for the loan term, overdraft fees can rack up a big tab in a very short period of time.  To save oneself from unexpected “Card Denied” situations, we recommend that you keep tabs on your bank account to make sure that you have enough funds before checkout.

“Bank of America Junks Overdraft Fees….”

B of A won’t be the only one: this new law will cause many other banks to follow suit, however, implementation might be a challenge because of  the software capability needed to adapt to individual preferences, according to some banking institutions.   However, no system changes will be needed by Bank of America to make this transition. If you are concerned about overdraft protection and would like to opt out of Overdraft Protection now, Bank of America advises that you call the number on the back of your debit card or visit a branch to speak to a BofA associate.

The income derived from overdraft fees have “paid the bills”  for many banking institutions, and now that they are going to get less of that, banks will have to create revenue elsewhere, like offering less free checking accounts, increasing loan interest rates, and charging more ATM fees.  Although the overdraft fee legislation may save you some money here, there are still other ways that may cost you elsewhere.

You Have the Right to Choose Overdraft Protection

An overdraft occurs when a customer pays for an item using a checking account that has an available balance that is less than the cost of the item.  An overdraft fee is usually around $30 and occurs at every purchasing instance where an overdraft coverage would be needed to cover the cost of the item.  For example, if a person has $50 in a checking account, attempts to purchase $100 worth of groceries, and then runs over to the mall and purchases a $20 t-shirt at one store, and then a $3 coffee at the local Coffee Bean, this person could be charged $90 worth of overdraft fees in total, if the coverage was included in his banking contract.

Overdraft protection has been put under fire because of the amount charged per occurrence combined with it’s stealth implementation without the customer’s consent.  On several accounts, customers were enrolled in overdraft protection and charged per transaction, unknowingly. In addition, when surveyed, many customers would have declined the coverage if given a choice.  Consequently, the Overdraft Fee Legislation’s objective to stop undesired overdraft protection and its associated fees by requiring explicit permission from the customer, has resulted in less overdraft protection usage.  Although this option is still there, this service should only be utilized by the customer’s choice.

Credit Card Limitations Cause Banks to Turn Customers Away

Credit card late fees occur when a customer does not make their payments on their assigned due dates.  When compounded with the existing interest rate fees, credit card associated penalties can add up.  The new Credit Act of 2009 ( Credit Card Accountability Responsibility and Disclosure Act of 2009 ) imposes caps on interest rates as well as other regulations that make imposing frivolous fees.  Because of these limitations, credit card companies have tightened up lending because of the need to reduce credit risk to risky borrowers.  Therefore, a large number of consumers with not-so-perfect credit can no longer qualify for credit cards.

In the past, customers relied on checking accounts and credit cards as two regular major sources of currency.  However, enactments such as the Overdraft Fee Legislation and Credit Act, putting limitations on policy and enumeration of interest rates and fees on banks, stifling the checkings and cards industry, customers seek alternative loans such as payday loans to replace this gap.

February 26, 2010 Los Angeles, CA.  Pay1Day.com. As new consumer protection acts decrease traditional lending opportunities, alternative loans, namely payday loans, have been on the rise, along with debate from both the consumer and lender standpoint regarding policy and practice.

Comparing to traditional loans,  payday advance loans costs can be attributed to the ease and speed of acquisition with minimal requirements of income, credit history, and housing, along with the resources needed to dispatch loans more easily and faster, usually under one business day.  Because of these inherent risks, payday loans are offered at a higher cost. Nonetheless, growing controversy continues as the rate of borrowers taking out payday loans increases, questioning the loan’s interest rate, fees, and policy as well as their necessity.

The usual payday loan fees are $15 – $35 per $100 borrowed within a 2 week period (the period in between pay dates) and are meant to be taken out only in real need when other alternatives are unavailable, such as borrowing from friends or using credit cards.  In addition, payday cash advances are intended to be held just in between pay periods and not throughout the year, hence its name, “payday” loans.

Payday loans are not new inventions. Big banks have increasingly extended similar types of products under names like checking advance services, with Wells Fargo offering such a product since 1994. The major difference is that payday loans, offered by independent financial institutions, are not backed by the federal reserve, offering a greater risk to the payday lender, seeking counterbalance by passing costs to the borrower.  In addition, with the above-average payment default rate in the payday industry, it becomes more clear why higher risk loans, such as payday loans, come at a raised price.

If a loan is paid in full upon the first due date, then the interest rate of this loan falls approximately between 15% – 35%. The problem occurs when the borrower is late on payments or makes a minimum payment that results in rolling over a balance to a next term because additional fees will be applied to the account which can become very costly, especially if this is made into a regular habit.

The choice to apply for and obtain a payday loan is up to the customer.  However, the duty to notify the customer of the loan’s terms and fees befalls on the lender. If the customer agrees to the lender’s upfront notice regarding rates, terms, and fees, then that results in a contract with no foul play, not different from the decision of paying the premium price tag for designer clothes or luxury automobile.   In that case, it would not be similar to a hidden overdraft protection fee or arbitrary credit card interest rate hikes.

The problem occurs when there are concealed terms and fees such as the ones resulting in the Overdraft Fee Legislation and Credit Act of 2009 that protected consumers from too-small-of-a-fine-print terms and unfair interest rate hikes. If a customer is made fully aware of their terms and fees obligations, a providing lender, whether it be a bank or a payday lender, should not be held liable for the customer’s inability to fulfill them.