02 Apr Should I Overdraft Or Use An Online Loan?

woman with empty pockets

Should I Overdraft Or Use An Online Loan?

When a financial emergency occurs, it has a way of happening at the worst possible time. It seems that is just how life operates. A financial emergency often requires us to make difficult choices about how we are to handle it. When we have a mandatory expense but not enough funds in our account to cover it we generally have two options; overdraft your bank account or get an online loan to cover it.

Overdrafting your bank account is when you pull more money than what is available in your account. This generally results in a fee per transaction that brings your account into the negative. While the fee varies per bank, the CFPB has stated the average fee is around $34 per transaction.

Online loans apply to any loan you get online. The vast majority of these will be short term in nature as they appropriately fit the situation. You’re obviously not going to take out a mortgage online to cover a $50 shortage. Online loans vary greatly and are often times similar to payday loans; which you may have heard about their high rates in the news. For our purposes today (obviously biased) we will use Credit Fair-E’s no credit check installment loan in our example.

Let’s say for the purposes of this example that you need $100 to cover your car expense, but only have about $50 in your bank account. You need an additional $50 to make sure you get your car running so that you can make it to work tomorrow. We will also round up the average overdraft fee to $35 for simplicity. We’ll also assume you only have a week or so until you can cover the expense with your next paycheck.

Overdraft Result

Should you choose to overdraft your account in this scenario you will end up with a net negative balance of -$85. Assuming you can pay the loan back in the next few days, that should be all you are out. However, some banks charge an “extended overdraft fee” which is basically a daily or weekly fee for continuing to keep your account in the negative. This can really add pain to the situation as some can be $25 dollars a week. If this applies to your bank (conservatively we will say it is), then you will actually be out a total of -$110 or $60 more than your original transaction. In other words, 120% fee for that transaction.

In a normal world, you would probably need to get gas in your car and perhaps grab some groceries to make it through the week. Each of these transactions would add an additional $35 dollar to the end result. Assuming you can get by with only two transactions you are paying about $130 in fees. It is also important to note that the overdraft scenario assumes your bank will let you go this far into the negative. Most banks have an overdraft limit that is unique to each customer. At some point they will start declining your card as opposed to letting you go into the negative further and just pay the fee.

Online Loan Result

Instead of drafting your account negative, you can always obtain a loan from Credit Fair-E. Assuming you qualify for the maximum loan size, which at this time is $500, you will have a monthly payment over the next 12 months of $50.23. This comes out to a total payback amount of $602.76 or $102.76 in total interest paid. Essentially $7 dollars or so cheaper than the previous alternative. This isn’t the only benefit to getting an installment loan over the overdraft fee however, you also gain the flexibility to pay back the amount borrowed over a longer period of time. This will be a less stressful experience for you.

Additionally, this amount is assuming you take all 12 months to repay the loan. Should you repay it sooner, the amount of interest paid would be lessened. You will also have the benefit of being able to make those grocery and gas purchases (and more) without feeling like each time is adding a large fee for you to pay. The only downside to this is that you need to at least apply about 24 hours in advance of your financial need, to ensure you receive the funds in time. While the processing of the application is quick, your bank may not be.

 


 

It’s important to remember that every situation is unique and should be evaluated so. Should your scenario be different the right choice might not be an online loan. For instance, say you literally only needed the one transaction of $100 covered until your direct deposit two days later. If that were the case, the overdraft fee would be the more appropriate choice considering the full scenario. Stay educated on what options are available to you. Credit Fair-E does not pull credit to approve a loan and each online lender will vary in that policy. There are a lot of options out there though even if you have no credit or bad credit.

If after reading this article you feel that a fair loan from Credit Fair-E would be right for you, you can do an online loan application here.