The next time you apply for an online payday loan, you may have to worry about more than just the interest rate and potential fees, warns a new study from a government watchdog agency.
According to a report from the Consumer Financial Protection Bureau (CFPB), a growing number of Americans are witnessing exorbitant banking fees and the loss of their bank accounts once they have signed up for a payday loan. The CFPB said in its report that half of Americans who have applied for an online payday loan have faced an average of $185 in bank fees.
But why are consumers’ accounts being affected following a payday loan on the Internet? The consumer government watchdog group cited a number of reasons. One of the issues stem from not having enough money in their accounts, which comes with overdraft fees and failed transactions – one-third of consumers lose their accounts when there’s a negative balance.
What’s worse for consumers is that once lenders have a customer’s bank account and they try to initiate transactions, and fail, new fees are added every single time. This has prompted lenders to break up their payments into smaller amounts in order to increase the odds of a successful transaction. For example, if the principal amount was $500 then they could try to take out $100 at a time. So, if there is nothing in the bank account then consumers could face five overdraft charges.
The head of the CFPB warns that an online payday loan can ultimately lead to “collateral damage” for a consumer’s bank account.
“Bank penalty fees and account closures are a significant and hidden cost to these products,” said CFPB Richard Cordray in a statement. “We are carefully considering this information as we continue to prepare new regulations in this market.”
Cordray added: “Getting booted from the banking system can have far-reaching repercussions for consumers, leading to a downward spiral that costs them even more money and their precious time.”
He did say, however, that lenders are entitled to be paid back the money they lent out. With that being said, he doesn’t want these online lenders to abuse the customer’s’ bank accounts. Not only are payday loan borrowers faced with enormous costs of a payday loan, but then the large, hidden bank penalties and fees are additional costs borrowers have to pay.
Following 18 months of arduous research, the CFPB perused 330 online lenders. At the end of it, close to 20,000 bank accounts received payment requests from at least one of those online payday loan providers.
This is just one of many research reports the CFPB has conducted since being started by President Obama in 2009. The CFPB has vowed to initiate regulations that rein in the industry and protect American consumers. The White House recently told faith leaders that officials will be working closely with the CFPB and lawmakers to pass legislation that tackles the issue.
One rule being proposed by the CFPB that is concerning the industry would be slapping limits on how and when payday loan businesses can access customers’ bank accounts.
Industry insiders are lobbying to quash the rule, and Republican policymakers on the House Financial Services Committee have been apprehensive over the CFPB recommendation.