Hidden Consumer Loans: An Analysis Of Implicit Interest Rates On Bounced Checks
By Marc Anthony Fusaro Department of Economics, East Carolina University
July 2007

Summary

• “Almost 57% of account holders have overdrafted at least once since opening their accounts.”
• “Customers, on average, overdrafted 46.2 times in the … 10 years since opening their accounts.”
• “Unexpectedly, no discernable patterns emerge from these data indicating that people of all income levels overdraft equally often.”
• As of 2003, the “occasional overdrafter” (i.e., those who utilize overdraft protection less than 10 times annually) “are paying an average of $112 per year in overdraft fees. This does not include NSF fees paid on bounced checks, only paid overdrafts.”
• For more “frequent” (more than 10 but less than 100 overdrafts per year) and “chronic” (100 or more overdrafts annually) overdrafters “are spending $1,280 and $3,440 [respectively] in annual overdraft fees.”
• “We find that overdrafters can pay fees exceeding $3,000 per year which implies an interest rate in excess of 1,700%.”
• “A person who has a three dollar overdraft that is outstanding for one day pays an implicit interest rate of 260,245%.”
• “Clearly, bounce check loans are not a good source of short term debt…. With annual fees totaling over $3,000 and four digit interest rates, most frequent users pay quite heftily for the money that they borrow.”