Payday lender prepaid cards: the worst plastic in the world?
Payday loans are among the most expensive legal forms of credit around. And for the past few years, payday lenders have been lucratively marketing a new service -- prepaid debit cards -- that can make the loans even more troublesome.
"Anything that's attributable to a payday loan company is trouble from the get-go," says Kevin Weeks, president of the Financial Counseling Association of America, a Washington-based nonprofit group.
Payday loan prepaid cards aren't like the prepaid gift cards you pick up at CVS or Target, nor like mainstream reloadable prepaid cards from national banks. These cards allow payday lenders to go in and grab funds from borrowers' accounts on loan due dates, and they're loaded with high fees.
With a regular payday loan, borrowers secure a loan in advance by writing a check postdated to their next payday, or authorizing its equivalent online. But millions of Americans don't have bank accounts, and that's where payday lender prepaid cards come in.
Consumers can go to a payday lender -- Cash America, Check 'n Go, Advance America or Check City, to name a few -- and apply for one of these cards, such as the NetSpend Prepaid MasterCard, Purpose Card, Insight Visa Prepaid Card or U.S. Money Card. When they do, they consent to having their paycheck loaded onto the prepaid card, but they also authorize the payday lender to debit the prepaid account for loan repayments and for assorted fees.
Anything that's attributable to a payday loan company is trouble from the get-go.
Financial Counseling Association of America
It can be confusing because many of these people already use regular prepaid debit cards as a substitute for a checking account. They have their paychecks loaded onto the card and then use it to pay for goods and services much like a credit or debit card -- except that when the money on the card is used up, it can't be used again until the user reloads it with more funds.
While payday lender cards might look and sound the same as mainstream prepaid cards, they're not, says Lauren Saunders, associate director of the National Consumer Law Center (NCLC), a Washington-based advocacy group. Saunders wrote a July 2015 study, "Payday Lender Prepaid Cards." It found fees of up to $14.95 for declined electronic payments and up to $25 to stop recurring payments. One card in the survey charged $4.95 for successful repayment of a loan.
"Prepaid cards that enable payday loans -- and generate fees triggered by those loans -- exploit vulnerable consumers and break the promise of prepaid cards as a safe way to control spending," the study concludes.
Even basic services such as card replacement come with fees that exceed those of regular prepaid cards.
The fees pile up, quickly. NetSpend prepaid cards, for example, are available through four of the five top payday lenders, sometimes branded under a different name. The card's 27-page customer agreement mentions the words "fee" and "fees" 127 times.
While mainstream prepaid cards don't permit overdrafts and thus don't have overdraft fees, many payday lender cards do. Overdraft fees allow consumers to purchase overdraft protection, and also allow them to negative spend. In other words, the card would authorize a $100 purchase even if there's only $20 on the card. When that happens, the consumer is hit with an overdraft fee of about $15, according to NCLC research.
Users do overdraw: NetSpend made $50 million in overdraft fees in 2014. And though it provides a free $10 overdraft cushion, 88 percent of NetSpend's overdraft users pay fees, NCLC research shows.
|PAYDAY LENDER PREPAID CARD FEE COMPARISON|
|How do fees from a payday lender prepaid card compare with fees from mainstream prepaid cards? Here's a comparison of some fees from two popular prepaid cards: Chase's Liquid and the NetSpend Visa prepaid card.|
|Fee||Chase Liquid||NetSpend Visa|
|Opening fee||$0||Up to $9.95, with fees depending on operator of retail location|
|Monthly service fee||$4.95; $0 if card is linked to a qualifying Chase checking account||$0 to $9.95, depending on card plan|
|Transaction fee||$0||$0 to $2, depending on plan|
|Cash withdrawal fee, over the counter at financial institution||$0||$2.50|
|ATM withdrawal fee||$0 at Chase ATM; $2 at non-Chase ATM, plus ATM owner fees (until Nov. 9, 2015, then $2.50 plus ATM owner fees)||$2.50, plus ATM owner fees|
|ATM decline fee||$0||$1|
|Card replacement fee||$0||$9.95|
|Overdraft fee||No overdraft offered||$15 for the optional service; maximum of 3 fees per calendar month|
|Source: CreditCards.com research, October 2015|
Those fees effectively boost the cost of the payday lenders' prepaid cards even higher. Payday loan interest rates can run from 390 percent to almost 800 percent, according to the NCLC. The loans require a balloon payment -- the principal and interest are due in full on the due date.
So, a $300 payday loan would require a payment of $345 two weeks later. On an annualized basis, that's already a 300 percent interest rate. Overdraft fees, should the cardholder spend more than what's on the card, could kick that 300 percent rate into the 500 percent range, according to Saunders.
"The main difference between [mainstream cards] and payday lender cards: The payday lender can take the right to grab your paycheck when it comes in," Saunders says. Cardholders who are particularly cash-strapped also authorize future deductions, which means users can get stuck in an endless cycle of taking out loans and paying interest rates and fees.
NetSpend, for its part, says that users opt in for overdraft fees. In comments filed with the Consumer Financial Protection Bureau in March 2015, Charles Harris, president of the Austin, Texas-based company, wrote that further regulating overdraft services would "negatively impact consumers by limiting their ability to obtain funds when they are most needed."Big business
Payday loans themselves are certainly not going away -- at least not in most states. Thirty-two states have enacted legislation allowing loans with triple-digit interest rates, according to the Consumer Federation of America.
In fact, what worries Saunders is that payday lenders are developing new forms of loans, including installment loans and lines of credit. "The credit lines payday lenders develop will have extremely high costs," Saunders says.
Put those onto a prepaid card and the risk for borrowers becomes even greater. Prepaid cards are unregulated -- they're not covered by the Credit CARD Act of 2009, which regulates credit card interest rates and fees. Nor do they fall under the Electronic Fund Transfer Act of 1978, which provides protections for debit card users.
Yet prepaid cards are big business. The number of all prepaid card transactions mushroomed 150 percent between 2009 and 2013, jumping from 1.3 billion in 2009 to 3.3 billion in 2013.
They're not all bad, of course. The mainstream prepaid products from Visa, Chase and others can provide a valuable service for consumers who use them for budgeting or instead of a regular bank account. But even mainstream prepaids have come under criticism for not being transparent enough about their fees.
In 2014, the Consumer Financial Protection Bureau, a Washington-based government agency, began looking into regulating all kinds of prepaid cards. Why? The bureau, citing FDIC statistics, says that prepaid card users are "disproportionately" consumers with a basic bank account or no bank account at all. These consumers "are some of the most economically vulnerable among us," stated Richard Cordray, the bureau's director, in comments published in November 2014.
The bureau finds that fees are either tucked into fine print or buried somewhere on a website, and its proposal includes requiring issuers to provide "clear and understandable" disclosures to consumers before they buy a card.
But fees for payday loan prepaid cards can be even more opaque. As research, this reporter asked about a prepaid card at a Chicago payday lender. The agent said the application had to be filled out in the store -- he was behind bulletproof glass -- and handed over a leaflet containing the cardholder agreement. The fine print covered 11 pages the size of standard business envelopes, in squint-worthy type. Some fees, including $1 to talk to a live agent and $3.95 for account inactivity, were spelled out; in other cases, the agreement said fees may be assessed but the amount and circumstances were not clear.
The bottom line: Even a consumer shaking out couch cushions for quarters should run, not walk, away from payday lender prepaid cards.See related: Payday loan alternatives more important than ever, Dangers of applying for an online payday loan, 6 things to know about reloadable prepaid cards
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