No, this isn't a payday loan.
This is basically the deal you receive from banks and credit unions when they give you a short-term loan to cover an overdrawn account.
A few years ago, lenders would return a check or deny an electronic transaction if you didn't have enough money in your account. Now they make an overdraft loan - often without your consent -- and charge a hefty fee averaging $34, according to a recent study by the Center for Responsible Lending.
Overdraft loan fees reach $17.5 billion a year, the study found. That's $1.7 billion more than the amount borrowed.
The American Bankers Association says overdraft loans help consumers avoid the embarrassment, inconvenience and merchant fees from a bounced check. And the group adds that it's in the consumers' hands to avoid penalties.
On that last point, the banking group is right. It is possible to avoid overdraft loan fees. Banks and credit unions might not always make it easy. The Center for Responsible Lending reveals banking practices that can increase overdrafts. But a diligent consumer can sidestep this quagmire.
One of the first steps is to find out if your financial institution offers an overdraft program, and opt out if it does, said Eric Halperin, director of the Center for Responsible Lending's Washington office. "If they can't, they should find a bank that doesn't have an overdraft program," he said.
See if your lender will allow you to link your checking account to a savings account or credit card, said Jean Ann Fox, director of consumer protection for the Consumer Federation of America. That way if you overdraw, the money will be taken from savings or applied to your card. You'll pay a fee. Plus, you'll owe interest with the credit card.
"But when you cover an overdraft with your own money instead of the bank's money, it tends to be somewhat less expensive," Fox said.
For instance, banks typically charge $10 to move money out of savings to checking. "That's better than $34," she said.
You also can apply for an overdraft line of credit to cover an account shortfall. The annual interest rate on that line of credit usually runs about 18 percent, Fox said.
Carefully track every penny coming and going out of your account.
That means writing down every check you write, every fee you pay and every automated teller machine withdrawal and debit card purchase you make "so you know the real balance," Fox said.
You can't rely on balances posted online or at the ATM, she warns.
Those balances might not reflect paper checks you wrote but that haven't landed at the bank yet.
Also, have your paychecks directly deposited to your account so you get access to your funds faster, Fox suggests.
Avoid using a debit card for small purchases if your account doesn't have much cushion. The bank might not give you any warning that you're overdrawn. So you could be socked with a $34 fee for every $2 cup of coffee or slice of pizza you buy with your debit card.
"You'll pay more in fees than you borrowed from the bank," Fox said.
