What are “bounce” loans?

Bounce loans are something to avoid. Be particularly aware if your bank uses a "high to low" system detailed below.

Overdraft or "bounce" loans are a form of overdraft coverage whereby banks or credit unions charge penalty overdraft fees when consumers overdraw their accounts by check, at automated teller machines or using a debit card.

Unlike traditional overdraft protection, these services do not require consumer consent and do not provide cost of credit disclosures under the federal lending laws, and do not guarantee that the bank pays the oerdrafts.

The bank pays the amount of the overdraft and charges the customer a fee that ranges from $20 to $35. Some banks also charge a daily fee until the "loan" is paid in full.

These high fees are triggered regardless of whether the overdraft his $5.00 or $500.00, and the bank will generally not notify the customer of the overdraft nor give the option to cancel the transaction.

Borrowers pay triple and even quadruple digit interest rates as a "real" effect of these "bounce" loans.

From the National Consumer Law Center’s publication "Foreclosure Prevention Counseling", pages 68-70, here is an example:

For example, if teh overdraft loan fee was calcualted as an Annual Percentage Rate, a $22.50 fee for an $80 overdraft loan translates into a 1,467% APR for a loan paid back in a week and a 733% APR if the loan is repaid in two weeks.

Even worse, some banks ratchet up the fee income intentionally by using a "high to low" method of honoring checks and debits to the account, as opposed to paying them (and applying deposits) in a chronological order. In other words, according to the NCLC, the bank will pay the largest obligation first each day and sometimes apply deposits AFTER debits. This abusive practice can trigger a cascade of overdrafts if the account does not have sufficient funds to cover all of the small checks.

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