Subscribe

Looking for a quick loan? It might have a big overdraft fee attached.

Online payday loans can look enticing, but they can come with hefty fees attached, according to a report from the Consumer Financial Protection Bureau.

  • close
    US hundred-dollar bills are seen at AYA Bank's money changer in Yangon, Yangon Region, Myanmar (Burma) (July 17, 2015).
    Soe Zeya Tun/Reuters/File
    View Caption
  • About video ads
    View Caption
of

Half of all online payday loan borrowers are hit with bank penalties averaging $185 when the automated payments on their loans fail or cause an overdraft, according to a report from the Consumer Financial Protection Bureau.

More than one-third of borrowers with failed payments eventually lose their bank accounts, the CFPB says.

Online payday or installment loans are short-term, high-interest loans granted to borrowers without a traditional credit check. Some must be repaid in a lump sum after a week or two, and others may be repaid in installments over several months or years.

The CFPB examined nearly 20,000 bank accounts making payments to 332 of these lenders over an 18-month period from 2011 to 2012. The lenders typically use an electronic funds transfer system to deposit the loan directly into the consumer’s checking account, then use the same mechanism to withdraw the money owed come payday.

“Payday lenders promise instant cash, but since they don’t check your credit, these loans can have interest rates as high as 1,000%,” says Amrita Jayakumar, a NerdWallet writer who specializes in personal loans. “When you’re hit with bank fees on top of high interest, it’s even easier to get trapped in a cycle of debt.”

‘Collateral damage’ from repeated payment attempts

When lenders attempt to debit payments from accounts with insufficient funds, the borrowers face overdraft or insufficient funds fees.

Lenders often make multiple attempts to debit the account in the same day, the CFPB found, and sometimes try to retrieve a payment in multiple chunks to increase the likelihood that the borrower can repay at least part of the loan. Each failed attempt can result in high fees in quick succession for the borrower; the typical bank penalty for each overdraft or insufficient funds notice is about $35.

The likelihood of successful payment falls with each succeeding request, the CFPB said. The first attempt typically nets lenders $152, the second $53, and the fifth just $21, data showed.

In addition, lenders themselves may charge penalties for failed payments, which can range from a flat fee of $25 to a percentage of the outstanding balance, levied daily.

Of the borrowers who were hit with a bank penalty, 36% ended up involuntarily losing their bank accounts, usually within 90 days of the first failed transaction. Involuntarily losing a checking account at a bank or credit union can leave customers blacklisted from getting another such account in the near future.

“Taking out an online payday loan can result in collateral damage to a consumer’s bank account,” CFPB Director Richard Cordray said in a statement. “Bank penalty fees and account closures are a significant and hidden cost to these products.”

The fees are bad; the loan is worse

The CFPB, which has authority over the payday loan and payday installment loan markets, is considering a proposal that would block payday lenders from making more than two unsuccessful attempts in a row on a borrower’s checking or savings account. A ruling is expected this spring.

Borrowers with bad credit already face steep odds, Jayakumar says, even without the added burden of bank penalties. In order to get a loan with terms generally considered consumer-friendly — that is, interest rates of 36% or less — borrowers face a traditional check of credit report and credit score. The borrower’s debt-to-income ratio is also a key factor in approval.

She suggests borrowers investigate more traditional sources of small-dollar loans, such as credit unions and online lenders that check credit. Some accept credit scores below 600.

The difference between the two types of loans is stark: A $2,000, two-year loan even at 36% APR would have monthly payments of $119, Jayakumar notes. At 200% APR, a conservative rate for an online payday installment loan, the payments would be $341.

Sean Pyles is a staff writer at NerdWallet, a personal finance website. Email: spyles@nerdwallet.com. This article first appeared at NerdWallet.

The Christian Science Monitor has assembled a diverse group of the best personal finance bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link in the blog description box above.

About these ads
Sponsored Content by LockerDome
 
 
Make a Difference
Inspired? Here are some ways to make a difference on this issue.
FREE Newsletters
Get the Monitor stories you care about delivered to your inbox.
 

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK