Short answer: an overdraft fee is a flat charge, so on a small amount for a few days it costs far more than a loan would. The CFPB found a median overdraft fee of $34 at the banks it studied, and said that borrowing $24 for three days with a $34 finance charge would carry a 17,000 percent APR (CFPB). For a planned shortfall, a small loan with an APR, such as a credit union payday alternative loan, can cost much less.
What the CFPB found
- For debit card transactions, the median amount that led to an overdraft fee was $24; for all types of debits it was $50 (CFPB Data Point).
- More than half of consumers who overdrew brought their accounts positive within three days, and 76 percent within one week (CFPB Data Point).
- The median overdraft fee at the banks studied was $34 (CFPB).
These figures come from a 2014 study of large banks. Your bank's fee may be different, and it is listed in your account's fee schedule.
An overdraft fee as an APR
Assumptions: one overdraft fee of $34.00, the CFPB median, used here as an example. APR = fee / amount x 365 / days. Our math; the CFPB did not publish its formula.
| Overdraft amount | Repaid after | Fee | Equivalent APR |
|---|---|---|---|
| $24.00 | 3 days | $34.00 | 17,236% |
| $24.00 | 7 days | $34.00 | 7,387% |
| $50.00 | 3 days | $34.00 | 8,273% |
| $100.00 | 7 days | $34.00 | 1,773% |
The first row is the CFPB's example, which it states as 17,000 percent. The fee does not change with the amount, so the smaller the overdraft and the faster you repay it, the higher the APR. Each overdrawn item can bring its own fee: three small purchases on an overdrawn account at $34.00 each would be $102.00.
Compared with a small loan
Assumptions: you need $200 for one month. A federal credit union payday alternative loan (PAL) can be $200 to $1,000 for 1 to 6 months, with an interest rate of no more than 28% and an application fee of no more than $20 (NCUA). At the 28% maximum, one month of interest on $200 is $200 x 28% / 12 = $4.67, so with the full $20 fee the cost is $24.67. These are examples at the legal maximums, not quotes.
| Way to cover $200 for a month | Cost |
|---|---|
| PAL at 28% interest plus a $20 fee | $24.67 |
| One overdraft fee of $34.00 | $34.00 |
| Three overdraft fees of $34.00 | $102.00 |
A PAL is not instant: for PALs I you need at least one month of membership first. The rules and the cost on a larger loan are in our payday alternative loans guide. For other small loans, compare the APR and the total of payments on the disclosure (how to read a loan disclosure).
Your choice on debit card and ATM overdrafts
- A bank may not charge a fee for paying an ATM or one-time debit card transaction through its overdraft service unless you have opted in, after a written notice describing the service (12 CFR 1005.17(b)).
- You can opt in at any time, and you can revoke your opt-in at any time; the bank must act on it as soon as reasonably practicable (12 CFR 1005.17(f)).
- The opt-in rule covers only ATM and one-time debit card transactions, so checks, automatic payments and other debits can still lead to overdraft fees (CFPB Data Point).
- Ask your bank what happens to a debit card purchase if you have not opted in, and whether it offers low balance alerts or a transfer from savings.
If an automatic loan payment is what overdraws your account, see what happens if you miss a personal loan payment and talk to the lender before the due date.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.