Payday loans have gotten a bad reputation over the last several years. The short-term, high-interest loan is constantly chastised by public officials, non-profit organizations, consumer advocacy groups and anti-poverty activists. They say these financial products hurt the poor and send middle-class households into a never ending spiral of debt.
But what about overdrafts that so many banking customers use when facing pecuniary difficulties? Well, they may become the new enemy of the aforementioned entities.
According to a new study by consumer watchdog Which?, using your overdraft can be costlier than taking out a payday loan. In fact, as the survey suggests, it can be up to four times more expensive than taking out two-week payday advance loans, which is also exorbitant for borrowers – the organization cited the average APR of 1,509 percent as an example.
The consumer watchdog stated that its findings highlight the fact that regulators need to start cracking down on unauthorized overdraft charges that often cause significant harm to the most vulnerable of banking customers.
What exactly can be done? The consumer body advocates a cap on interest and fees.
“People with a shortfall in their finances can face much higher charges from some of the big high street banks than they would from payday loan companies,” said Alex Neill, director of policy and campaigns at Which?, in a statement.
“The regulator has shown it’s prepared to take tough action to stamp out unscrupulous practices in the payday loans market, and must now tackle punitive unarranged overdraft charges that cause significant harm to some of the most vulnerable customers.”
Soon after the results of this study were published, the finance industry responded.
RBS, for instance, issued a statement, averring that it encourages all of its customers to contact a branch if they feel they are going to enter into unarranged overdraft. Since the financial institution realizes this is an expensive type of borrowing, RBS helps them find an array of alternative solutions.
Meanwhile, the British Bankers’ Association (BBA) also sent out a statement, alluding to the fact that overdraft charges have “plummeted” since the global financial crisis. The BBA noted that consumers have saved nearly $1 billion over the last five years.
“Banks are helping customers compare account charges in a variety of ways, from making them easier to understand to providing useful online calculators and mobile apps,” the BBA said in a statement. They also itemize charges on bank statements and use text alerts to communicate important account information instantly. If a customer thinks they might go overdrawn, they should speak to their bank to arrange an overdraft to keep costs down.”
Now that the Financial Conduct Authority (FCA) has tackled the payday loan industry and reined in the unscrupulous lenders, the federal financial body may start to go after the banks and their expensive overdraft charges.