How Do Overdraft Fees Stack up to Bad Credit Loans?

Short-term bad credit loans like payday loans and cash advances have ridiculously high APRS—but overdraft fees can be even more expensive!

When faced with a surprise financial shortfall, you might find yourself having to choose between bad credit loans and overdraft fees to make ends meet. And while a $30 overdraft fee might seem preferable to short-term no credit check loans and cash advances, it might actually be the more expensive option!


Bad credit loans can be really expensive.

When you have bad credit and you need a loan—whether that’s an online loan or one from a brick-and-mortar lender—you aren’t going to be able to borrow that money from a bank or a traditional lender. You simply pose too high a risk.

Instead, you’ll have to take out a bad credit loan which—as the name suggests—is a loan that’s designed for people with lousy credit scores. These loans are oftentimes much more expensive than regular personal loans, but the right bad credit loan can still be a helpful financial too.

There are a couple of different types of bad credit loans. First, there are payday loans, which are small-dollar, short-term loans with an average principal of only a few hundred dollars, and an average repayment term of two weeks.

The average interest rate for a payday loan is $15 per $100 borrowed. But while that seems like a fairly reasonable rate, appearances can be deceiving. A two-week payday loan with a 15 percent interest rate actually carries an Annual Percentage Rate (APR) of almost 400 percent!

Title loans are another kind of popular, but highly risky bad credit loan. These loans are secured by the title to the borrower’s car or truck, which means that you can usually borrow more money with one than you can with a payday loan.

However, title loans are also incredibly expensive, with an average monthly rate of 25 percent that works out to a 300 percent APR. Furthermore, studies have found that one in five title loan borrowers has their vehicle repossessed after they can’t pay the loan back.

Lastly, there are bad credit installment loans, which function much like a regular personal loan, just with higher interest rates. Unlike short-term payday and title loans, which are paid back all at once, installment loans are paid back gradually over a set period of time.

But overdraft fees can be even more expensive!

Anyone who has ever maxed out their credit cards knows well that sinking sensation when the card is declined. Well, overdraft protection exists to prevent that same feeling from occurring when you use your debit card.

If you make a purchase that exceeds your bank account balance, overdraft protection covers the additional amount. However, the service will charge you quite the hefty fee in order to do so. While overdraft fees vary, they often average around $35 per transaction.

Oh yeah, that’s another thing about overdraft fees: They apply to every debit card transaction you make that overdraws the account. If you aren’t aware that your checking account is in the red, you could end rack up hundreds of dollars in overdraft fees on any number of small purchases.

(For an example of how a $15 McDonald’s outing can return a $120 bill—all thanks to overdraft fees—check out our recent blog post on ways you can avoid these fees altogether.)

Since overdraft fees are levied on a transaction of any size, so long as it exceeds the available funds, nailing down a relative APR for these charges can be difficult. But even the more generous estimates would still produce a rate that puts payday and title loans to shame.

In 2014, the Consumer Financial Protection Bureau published a study on overdraft fees. They found that the average overdraft transaction was $24, the median overdraft fee was $34, and that most of those fees were paid back within three days. If someone borrowed paid $34 to borrow $24 over three days, they reasoned, that would add up to an APR of 17,000 percent.

Yeah. Overdraft fees are really expensive.

Verdict: The right bad credit loan can be better than an overdraft fee.

When you’re facing a financial shortfall, you’ll often find yourself with a series of not-great to flat out bad options. And if you don’t have an emergency fund that you can dip into or friends and family that you can borrow money from, taking out a bad credit loan is probably your least-bad option.

But really, this verdict isn’t about taking out just any bad credit loan, it’s about taking out the right bad credit loan. Namely, one from a lender that cares about your ability to repay, that charges reasonable rates, and that reports your payment information to the credit bureaus—which could help improve your credit score over time.

This verdict also speaks to the extremely high costs of overdraft fees, which dwarf the rates on most bad credit loans, and also the way those costs can stack up in such short order. Once your account is in the red, any subsequent transaction racks up a new fee.

Of course, there are always exceptions The wrong bad credit loan can do just as much damage to your financial wellbeing as any overdraft fee could. And in certain circumstances, an overdraft fee might be a flat-out better option for you than even the best bad credit loan.

In the end, the best thing you can do for your long-term financial outlook is to create your own options. Building up a well-stocked emergency fund—maybe even one that’s linked to your checking account for a more affordable type of overdraft protection—lets you cover future financial shortfalls yourself. No borrowing required.

To learn more about managing your financial future, check out these other articles from OppLoans:

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