Whether or not payday loans are actually beneficial to borrowers in the long run have been under constant scrutiny by the Consumer Financial Protection Bureau. The latest issue that was put under the microscope was the effect that repayment debit charges have on a borrowers checking account, particularly when there are insufficient funds in the borrowers account.
A report released by the CFPB indicated that debit payments from a borrowers checking account added substantially steep, hidden costs to borrowers of payday loans. On average 50 percent of online borrowers incur about $185 in bank penalties as a result of over drafts and failed debit card payments. The study also found that about 33% of these accounts was involuntarily shutdown as a result of bank penalties.
In a press release, FCPB Director Richard Cordray said “Taking out an online payday loan can result in collateral damage to a consumer’s bank account. Bank penalty fees and account closures are a significant and hidden cost to these products. We are carefully considering this information as we continue to prepare new regulations in this market.”
Commonly known as “cash advances” or “check loans”, payday loans usually offer quick access to money at a very high cost and are usually paid back on the day the borrower receives the next paycheck. In some cases, lenders may offer installment loans. Based on information obtained over an 18-month period, the report also brought to light the manner in which online lenders attempted to recover payments by debiting a borrowers checking account. Often times, online lenders transfer funds to borrowers via an automated online network. Lenders then submit a payment request to the borrowers institution through the same system. Financially strapped borrowers, most often than not are hit by several, expensive debit attempts. If the first debit attempt does not work, lenders will repeat the debit charge. Some lenders will split the total amount owed into separate payments as a strategy to receive some of the money back.
In some cases when a lender does not have sufficient funds in their checking accounts, some financial institutions and credit unions may fulfill the debt by issuing an overdraft. If an overdraft is not issued, the bank or credit union will reject the payment resulting in fee. In addition, the lender will also charge the borrower a late fee, a returned payment fee, or both, resulting in negative bank balances.
Negative bank balances contribute significantly to shutdown bank accounts. The CFPB’s study found that payday installment loans are a significant contributor to bank account closures. In a press release, FCPB Director Richard Cordray said “Taking out an online payday loan can result in collateral damage to a consumer’s bank account. Bank penalty fees and account closures are a significant and hidden cost to these products. We are carefully considering this information as we continue to prepare new regulations in this market.”
For a copy of the report, please click here.