Online payday lending is riddled with problems and one of those problems is the hidden cost associated with the loan
A Consumer Financial Protection Bureau (CFPB) report found that half of online payday loan borrowers rack up bank penalties because at least one payment attempt overdrafts or fails.
The Bureau looked at 330 payday lenders during an 18-month period between 2011 and 2012 and found that half of online borrows were charged an average of $185 in bank penalties, on top of whatever fees the lender charged. During this period, 36 percent of accounts with a failed debit attempt ended up being closed by the bank or credit union, usually within 90 days of the first failed transaction.
Payday loans are illegal in North Carolina, but online lenders work around the law by being based outside the state. They are marketed as a way to bring in needed funds between paychecks, but often come with high percentage rates and fees. Payday loans are often used by borrowers with poor or missing credit history as a last resort.
Lenders deposit money into borrowers' checking accounts, which is also how loan payments are debited. If a debit attempt fails, the lenders often follow up with repeated attempts to collect the money, sometimes splitting a single payment into multiple smaller debits.
If the draft attempt fails, the bank will either fulfill the payment and charge an overdraft fee or reject the payment and charge a non-sufficient funds fee. On average, these fees ran about $34 in 2012.
When lenders do encounter a failed transaction, they will often try multiple times, even though the likelihood that they will collect anything shrinks with each additional transaction.