Looking for a quick loan? There could be significant overdraft charges.

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

More than a third of borrowers whose payments fail end up losing their bank accounts, according to the CFPB.

Online payday or installment loans are short-term, high-interest loans provided to borrowers without a traditional credit check. Some must be repaid in a lump sum after a week or two, and others can 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. Lenders typically use an electronic funds transfer system to deposit the loan directly into the consumer’s checking account and then use the same mechanism for withdrawing the money owed comes on payday.

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

“Collateral damage” resulting from repeated payment attempts

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

Lenders often make multiple attempts to debit the account on the same day, the CFPB found, and sometimes attempt to collect a payment in installments to increase the likelihood that the borrower will be able to 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 around $35.

The likelihood of a successful payment decreases with each successive request, the CFPB said. The first attempt typically nets lenders $152, the second $53, and the fifth just $21, the data shows.

Additionally, the lenders themselves can impose penalties for missed payments, which can range from a flat rate of $25 to a percentage of the outstanding balance, taken daily.

Among borrowers hit with a bank penalty, 36% ended up involuntarily losing their bank accounts, usually within 90 days of the failure of the first transaction. The unintentional loss of a checking account at a bank or credit union can blacklist customers to get another such account in the near future.

“Taking out a payday loan online 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 large, hidden cost to these products.”

Fees are bad; the loan is worse

The CFPB, which has jurisdiction over the payday loan and payday lending markets, is considering a proposal that would prevent payday lenders from making more than two consecutive unsuccessful attempts at a borrower’s checking or savings account. A decision is expected this spring.

Borrowers with bad credit already face a strong chance, says Jayakumar, even without the added burden of bank penalties. In order to obtain a loan on terms generally considered consumer-friendly – ​​i.e. interest rates of 36% or less – borrowers must face a traditional credit report check and the credit rating. The borrower’s debt ratio is also a key factor in approval.

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

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

Sean Pyles is a writer at NerdWallet, a personal finance website. Email: [email protected] This article first appeared on NerdWallet.

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