What’s in a Name?

The famous quote from Shakespeare’s Romeo and Juliet, “What’s in a name?,” provides appropriate context to understand overdraft protection from banks and the criminal costs they impose on bank customers.

The reason this quote provides context is that when banks “protect” you and charge a fee, it enables them to avoid the restrictions imposed by usury laws that would occur if they were charging you interest on a loan.

However, in the case of overdraft protection, a loan is exactly what the bank is offering you. Let’s say you have $49 in your bank account and a $50 check you wrote to the gas company gets presented, which the bank pays for you, charging a fee of $35. You then also get a notice that you are overdrawn by $1.00, which you deposit in the bank the following day to even things up.

What’s really happened here is the bank has lent you $1.00 for one day and charged you interest of $35. Converting these figures to percentages, the daily rate is 3,500% ( [$35/$1 ] x 100). The annual rate would be 1,277,500% ( ( [$35/$1 ] x 100) x 365).

By the way, in Pennsylvania, where Senior Life Advisor is headquartered, usury laws cap interest rates at 6%.* Of course, most borrowers pay more simply because they agree to it in their loan agreements, but the 6%, if nothing else, sets a standard by which 1,277,500% is likely to be considered usurious and illegal. However, since banks claim they are charging a fee instead of making a loan, it’s seemingly above board.

That’s what’s in a name.

Of course, the interest rates noted above were made more dramatic by the numbers we chose. If the bank offered overdraft protection to the tune of $500, which you deposited in the bank the next day, the daily interest would be just 7% ( {$35/500] x 100), or 2,550% ( ( [$35/$500 ] x 100) x 365) annually. This is slightly better, but still egregious.

Explaining the usurious rates your bank is levying is a useless conversation, unless you get some satisfaction from letting them know exactly how badly they are treating you.

If you want to avoid paying these fees:

  • See if you can get alerts from your bank when balances dip below a certain amount.
  • Check to see if your bank will provide overdraft protection from your savings account or extend a line of credit.
  • Avoid using your debit card, since costs can add up faster than you realize.

David R. Evanson is a financial journalist in Philadelphia.

*Anonymous, (2019). Pennsylvania Interest Rates Laws. FindLaw. Retrieved January, 2020