Your bank has probably tried to sell you on its overdraft protection plan, which covers you if you overdraw your checking account. It seems like a great service, until you dig a little deeper and find out the true cost of the program.

First, you have to recognize this service for what it is. Whether your bank calls it overdraft privilege, courtesy overdraft, or bounce protection, it’s really just their version of a payday loan — a way for you to cover your bills until payday.

And they rake in a ton of money from people who need a little extra cash for a week or two. Only instead of making you a traditional loan, and telling you the interest rates you’re paying, they charge you “overdraft protection fees.”

The fact is, if a bank covers your bounced check, it’s the same as if they made you a short-term loan. Some banks even promote these as “unsecured loans,” a way to “cover your expenses if you run short of cash between paydays.”

But watch out! These can be very expensive loans.

The True Cost Of Overdraft Protection

It’s not always easy figuring out what these loans cost in terms of interest rates.

You see, banks claim that covering your overdrafts is a “courtesy,” not a conventional loan. That means they aren’t governed by the Truth in Lending Act, which says that lenders have to state the loans in terms of an Annual Percentage Rate (APR).

Without the Truth in Lending requirements, you can’t easily compare one loan to another, and you don’t know what kind of interest rate you’re paying.

But banks feel these disclosure requirements are too much of a burden. So while they may market overdraft protection plans as loans, they get to skirt the law and play by different rules from everybody else.

By contrast, if you get a loan from an qualified online payday lender they will tell you exactly what the fee is for the loan, and what that equates to in terms of an APR. That’s fair.

Let’s look at the cost of overdraft protection in terms of dollars and in terms of interest rates.

With bounce protection, banks advertise that they will cover overdrafts up to a set dollar limit. The banks then charge the usual bounced-check fee (also called a nonsufficient fund fee), which runs about $20 to $35. Note that you get charged the fee for each transaction you make that overdraws the account. Some banks also charge a per-day fee of $2 to $5 until your account has a positive balance.

What does that mean in terms of Annual Percentage Rate (APR)? A lot.

A $100 advance for two weeks would typically carry an APR of 541%! But the bounce loan fees can be triggered by overdrafts of just a few dollars, making the APR even higher. Some consumers have been charged APRs of over 1,000%.

No wonder banks are pushing their overdraft protection programs onto the unsuspecting public -- it’s a huge moneymaker.

According to the FDIC, banks collected a whopping $32.6 billion in service fees on checking and other deposit accounts in 2003. Of that, $11.7 billion was from nonsufficient fund and overdraft fees from customers who overdrew their bank accounts.

Consumer Groups Warn Against Banks’ “Sneaky” Practices

The amount of money that banks make on overdraft protection is so huge because banks actively encourage you to overdraw your account when you run short at the end of the month — to spend money you don’t have. And that practice has gotten some national consumer groups up in arms.

Here’s what the Staff Attorney for the National Consumer Law Center says about these programs:

“Overdraft protection products are a deliberate, systemic attempt to hook consumers onto overdrafts as a form of high cost credit. There is no question that these products are loans at outrageously high prices.”

And the Consumer Federation of America warns:

“Banks are encouraging consumers to overdraw their accounts, then charging penalty fees when they do. Bounce protection is payday lending without the middleman.”

According to Forbes magazine, the banks also have a sneaky way of almost guaranteeing that you’ll overdraw your account. It’s all in how they process your checks.

You would think your bank would process your checks in the order they were written. Wrong! They use shrewd software to process the biggest checks first. That drains your checking account faster and makes it more likely you’ll bounce several checks at once.

The result: You get charged for each bounced check, and the bank earns more overdraft fees.

But it gets worse.

The Great ATM Deception

Some banks that offer overdraft programs can trick you into thinking you have more in your account than you do. Here’s how that works.

When you go to your ATM to withdraw cash, the bank doesn’t show you your real balance. Instead, they add in the overdraft amount — without telling you.

That makes you think you have more in your account, so you happily withdraw the money. What happens? You instantly go into hock and end up paying the overdraft fees!

This is deceptive because you don’t expect to overdraw your account using an ATM or your debit card. There’s just no reason for a bank to allow overdrafts by ATMs or debit cards — a withdrawal or purchase can simply be denied if there is not enough money in the account.

Banks don’t care. It’s a huge racket for them. It’s their way to provide short-term loans, make a ton of money, and get around the Truth in Lending Act by not informing their customers of the true costs.

Bank Overdrafts vs. Payday Loans

Before you use your bank’s overdraft protection program to cover yourself until the next payday, a better plan may be to borrow money legitimately, then pay it back when you have the funds. One of the easiest ways to do that is with an online payday loan.

Compare the costs:

The average bounced-check charge, including merchant fees, is about $48. Average overdraft fees range around $20-$35, plus you may pay a per-day fee of $2 to $5 until you have money in your account again. Not only that, the overdraft charges can be triggered even if you just write a check for a few dollars more than you have in your account.

Say you have five overdraft items that add up to $100. You could be paying as much as $175 in fees — plus any per-day fees the bank charges.

In comparison, the fee for taking out a loan of $100 for a couple weeks from a payday lender is typically just $25-$30.

Bottom line: A payday loan may be a cheaper alternative to bouncing checks and paying your bank’s outrageous fees.