BACK

Research and Statistics

Study: Payday loans trigger overdraft fees

Summary

Online payday borrowers who miss repayment face average $185 in bank overdraft fees, federal study finds

The editorial content below is based solely on the objective assessment of our writers and is not driven by advertising dollars. However, we may receive compensation when you click on links to products from our partners. Learn more about our advertising policy.

The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired. Please see the bank’s website for the most current version of card offers; and please review our list of best credit cards, or use our CardMatch™ tool to find cards matched to your needs.

Study: Payday loans trigger overdraft fees

High interest rates are just the beginning. Payday loans can also cost borrowers hefty overdraft fees when lenders try to collect.

That’s the bottom line in new research from the U.S. Consumer Financial Protection Bureau.

“We found that borrowers faced steep hidden costs in the form of bank penalty fees,” CFPB Director Richard Cordray said.

About half of online payday customers missed at least one repayment during the 18-month study period, triggering overdraft fees of $185 on average.

The reason: Online lenders have access to customers’ bank accounts, and submit payment requests over and over. For one bank account, the study found 11 payment requests in a single day. The typical overdraft fee is $34.

The study comes as the consumer protection agency prepares to put new rules on payday lenders and other costly short-term loans later this spring.

Rules first proposed in 2015 would cap rollovers of loans, or require lenders to verify customers’ ability to pay. The study released Wednesday indicates that the rule may also limit payment requests sent to banks.

Online payday lenders get access to borrowers’ bank accounts as their standard method of repayment. Storefront lenders may also get customers’ permission to tap their bank accounts, as a backup for in-person payment.

Besides fees, multiple overdrafts can cause payday borrowers to lose their bank accounts, Cordray said.  Over one-third of payday borrowers who were charged an overdraft fee lost their bank account, typically in 90 days. That left them at the mercy of costly alternatives such as check cashing.

The study found that online payday lenders often pinged customer accounts multiple times a day. They would break up the amount due in smaller pieces, hoping funds would be available. Thirty-four percent of payment requests occurred on the same day as another request by that lender. However, only 3 percent of subsequent requests succeeded when an earlier attempt failed.

In other words, lenders heaped multiple overdraft charges on customers, despite little chance of being paid.

“Of course lenders that are owed money are entitled to be paid back,” Cordray said. “But we do not want lenders to abuse their preferential access to consumers’ accounts.”

With annual interest rates that average 390 percent, payday loans are scorned by consumer advocates. Earlier CFPB research found that a third of payday customers took out 11 to 19 loans a year. Congress capped interest rates at 36 percent for active military members under the Military Lending Act.

The payday lenders group Community Financial Services Association of America says that the CFPB’s proposed rules would force many locations to close, leaving their customers without access to credit.

The CFPB said its study looked at 19,685 accounts at several large banks over an 18-month period. Each account had at least one payment request from one of 332 online payday lenders.The accounts paid online lenders an average of $2,164 during the period, including interest and principal.

See related:New rules proposed for payday loans

What’s up next?

In Research and Statistics

Infographic: Credit card complaint rates

Some credit lenders manage to lessen the number of complains lodged against them in 2015, compared to 2014

Published: April 19, 2016

See more stories
Credit Card Rate Report Updated: August 21st, 2019
Business
15.55%
Airline
17.49%
Cash Back
17.63%
Reward
17.49%
Student
17.69%

Questions or comments?

Contact us

Editorial corrections policies

Learn more

Join the Discussion

We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company’s business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.