Online payday loans hit consumers with hidden risk

Consumers who turn to online lenders for payday loans face hidden risks of costly bank fees and account closures, according to federal analysis released Wednesday.

Half of borrowers who obtained the high-interest loans online later were hit with an average of $185 in bank penalties for overdraft and insufficient funds charges when lenders submitted one or more repayment requests, according to Consumer Financial Protection Bureau analysis.

A third of borrowers who racked up a bank penalty eventually faced involuntary account closures, according to the report.

Online lenders made repeated attempts to debit borrowers’ accounts, resulting in additional bank charges for consumers, even though the efforts were generally unsuccessful in collecting payments, according to the study.

“Each of these additional consequences of an online loan can be significant, and together they can impose significant costs, both tangible and intangible, that go far beyond the amounts paid to the original lender alone,” said CFPB director Richard Cordray.

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The findings mark the consumer agency’s third analysis of the U.S. payday loan industry that provides the typically 300% to 500% interest-rate unsecured loans that many low-income borrowers rely on to pay. expenses between one salary check and the next. The CFPB plans to issue new loan regulations later this spring, an effort endorsed by the Obama administration.

CFPB analysts studied 18 months of data from the automated clearing house. Online lenders often use the financial network to deposit loan proceeds into borrowers’ current accounts, as well as to submit subsequent requests for repayment.

If a borrower’s account balance is low when the online lender submits a refund request, the bank may return the request for insufficient funds or approve the request. In either case, the bank may charge the borrower overdraft or NSF fees, as well as late or repayment fees.

Data from the study showed that the typical $185 bank fee for online payday loan borrowers included an average of $97 for an unsuccessful first debit request. Borrowers also faced an average fee of $50 when online lenders made a second debit request after an unsuccessful effort, and an average cost of $39 when a lender submitted multiple payment requests on same day.

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A total of 23% of accounts held by borrowers who obtained loans from online lenders were likely to be closed by the end of the 18-month sampling period, according to the analysis. The result was well above the likely 6% closure rate for bank accounts in general, according to the report.

About half of all payday lenders provide funds and request repayments online, the CFPB said. Payday lenders that do not offer online lending services were not included in the analysis.

About Judith J. George

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