Hidden Consumer Loans: An Analysis of Implicit Interest Rates on Bounced Checks

Document Type

Article

Publication Date

6-2008

Department

School of Business

Abstract

Payday lending attracts attention for its high interest rates, but bounce protection loans are much more expensive. Bounce protection is a program where consumers overdraft—write checks in excess of the checking account balance—and the bank pays the check allowing the account balance to be negative. For this service/loan, banks charge the standard non-sufficient funds (NSF) fee. When the amount borrowed is low and the time outstanding is short, the effective interest rate paid on this loan can be quite high. Using a unique data set we were able to quantify how high the interest rate is. We found that the median implicit interest paid by consumers is over 4,000%.

First Page

251

Last Page

263

Volume

29

Issue

2

ISSN

15733475, 10580476

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