You can bank on it. Or not.
by Richard
A riddle for our times.
Normally, banks make money by gathering in deposits — paying little or no interest to account holders — then re-lending the money to borrowers at a substantial markup.
Also known as “spread-lending”. And if the banks make loans to borrowers who pay back the money, life is easy and the bonus money keeps on flowing.
The conundrum facing banks today is that they have substantial sums to lend, but not enough borrowers who can qualify under the new rules and close scrutiny of their financials, now that liar’s loans are out of fashion.
Not to worry.
In 2006, the FDIC authored a study showing that three quarters of banks now automatically enroll depositors in overdraft protection programs….resulting in $2 billion in bank fees.
You may recall the conversation the last time you moved your account to earn your free toaster…where your friendly banker volunteered that you would never again face the embarrassment and humiliation of a bounced check.
With overdraft protection, the bank would make, in essence, a very short-term unsecured loan to cover any shortfall..most likely to be repaid from your regular paycheck after you also signed up for direct deposit.
What’s not to like? The typical fee per overdraft is a measly $33. You will spend more than that at a date night at the movies.
Let’s do the math.
You find yourself with too much month at the end of the money, and your Netflix account is due, and it auto debits your checking account. You thought you had sufficient funds, but maybe you forgot to deduct the prior month’s overdraft fees.
So the bank charges you $33 to make your $25 debit clear the account. And your regular paycheck deposits one week later, repaying your short term loan.
$33 is 132% of $25. Per week.
But for one week, you need to multiply the APR by 52 to get the annual rate.
Which would be 6,864%. Annualized.
Makes sense.
I can think of two professions noted for wearing pin stripe suits.
Gangsters. And Bankers.
Only the gangsters have to work much harder for their money.
This would be laughable if not so widespread and pervasive a behavior pattern.
It’s the butcher’s bill we must pay for our indulgence with innumeracy and our unwillingness to practice essential financial hygiene.
