Question & Answer

Question: Help! How do we explain the APR on an overdraft line of credit. The problem happens when the customer writes a fairly small check that triggers the overdraft plan and the transaction fee that we charge is imposed. Sometimes the APR can be over 40% even though our interest rate is competitive.

Answer: Customers don't always understand. They think that APR and interest rate are more or less the same thing. So they are likely to yelp when they see a high APR. To explain this, point out that the APR for an open-end line of credit such as the overdraft line is calculated every month or payment cycle. The APR takes into account both the interest and any finance charges such as the transaction charge. Thus, it is going to be disproportionately high. You might explain what the next payment cycle APR would be if the customer makes no additional draws. That will be a much lower (friendlier) number. You can also explain that the APR is based on an interest rate of 12% (or whatever your interest rate is) and then explain how competitive that is. Remember, as long as you stay within regulatory constraints about using terms such as APR, you are allowed to promote your products and make the bank look good.

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 12 & 13, 10/97