Short term loans - Overdraft Protection and Short term lending

The economic impact of Short Term Loans vs. Overdraft protection is interesting. Given that it is a state regulated industry with very little federal oversight and that oversight is primarily military lending, FTC marketing fairness and general fair underwriting guidelines. That puts incredible pressure on the state to regulate this 40 billion dollar industry. I would estimate that the actual Short Term Loan market is around 10 billion, with the remainder coming from over draft fees.

Most states consider overdraft protection under different laws than loans. The biggest reason I find this interesting is that most customers take short term loans to cover overdraft charges. The average transaction returned by a bank is for a $30.00 purchase, the bank then charges you a $25.00 returned check fee plus a $25.00 fee from the place you wrote said check.

Since most customers are paid every 2 weeks, and most need money toward the end of the pay period. We can assume that the average term of this overdraft will be for 4-5 days. To put that in perspective, depending on how they calculated charges that would put the APR for a typical overdraft at over 1,000% APR.
Most of the respected short term lenders of have very clear policies and cost of credit disclaimers that they are an expensive form of credit. If a person utilizes short term loans responsibly and receives funds before they incur overdraft expenses. They can end up saving around half of that overdraft fee. I am assuming of course, they do not 'rollover' or extend the loan which dramatically drives up cost of credit fees. In the situation that a customer knows they will have cash flow issues and are proactive in securing a short term loan, they can save themselves cash and headache.

This rollover or extensions that lenders use is what separates the good guys from the bad guys in the Short Term Loan industry. Allowing a consumer to make interest only payments on a 400+% APR loan is irresponsible lending and thus perpetuating the cycle of debt for this customer.
A balance needs to be found. Bank overdrafts need to lower in cost and penalty for them to be an effective tool at reducing short term loan usage. In the meantime, customers need to be pro-active in their cash flow needs and find a lender who has fair lending practices that can help facilitate the cash flow requirements.

As always, I would never advocate a consumer who is reliant on high interest loans to continue to apply. The cycle of debt needs to stop. These are a high cost of credit loan and need to be used judiciously.