Traditional overdraft protection is designed to help banking customers avoid “non-sufficient” fees from accidentally bouncing checks. Basically, this is an unsecured personal LOC (line of credit).
A line of credit is a loan for a maximum amount of money, a certain time, and interest rate that renews itself as you pay it down. The fact that it’s unsecured means you don’t have to put up something like a house or your car to secure the overdraft.
However, some overdraft arrangements may be tied to a home equity line of credit. You should know going in what kind of loan you are going to have. With unsecured personal lines of credit, banks are limited in what they can take from you to satisfy the note if you fail to pay. However, in the case of a home equity line of credit, the loan is secured ultimately buy your house. The bank may foreclose if you fail to pay.
This is basically designed to be a short-term loan you can get by simply asking for the money after you have set it up.
For example, if you only have $100 in your checking account, but write a check for $120, the bank will advance money in preset amounts to recover the check. In this case, the bank would put up an extra $100 in your account to cover the $20 overage.
There is a limit to the amount of money banks will loan for overdraft protection. Think in terms of $500-$2500. There also may be a fee applied. However, overdraft protection is a revolving line of credit. That means if you pay it down, the full amount becomes available again for use.
Banks and credit unions often offer overdraft as a service to their customers. If you don’t already have one, you will need to set it up by filling out an application with the bank. The beauty of this type of loan is that it should be fairly fast to set up and use. You set it up by filling out forms and you can activate it by writing checks.
This type of arrangement gives the borrower two very valuable resources.
- First, it truly is quick cash that is available right away without a lot of paperwork and the delays
- Second, it can save you a lot of money and bounced check fees and damages.
Of course there are also some disadvantages. For one thing, you have to have a checking account. Many people do not have checking accounts. Secondly, the bank has to approve you for the overdraft. Banks routinely screen customers and if they have bounced too many checks, they will not offer them an account. The other disadvantage is that if it becomes a permanent loan, the interest rates can be relatively high. However, the rate will still be cheaper than cash advances from credit cards.
Another disadvantage is that this is a loan with limits. Depending on the exact requirements of your bank, you may be required to pay off all the balance within a certain period of time. Also, these kinds of loans generally are only available in a range instead of an exact amount. For example, if you bounced a check for $138.50 you may have to borrow $200 to cover it.
People who want to pursue this as an option should be aware that not all overdraft protection is created equal. Banks have noted the success of the payday loan centers and some of them are now offering a similar product. Furthermore, more and more banks are allowing overdraft protection to come from a savings account or credit card.
The money comes out of what ever account the customer arranges in advance, so that part is OK, but if the money comes out of a credit card, you run the risk of racking up substantial interest fees.
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