Bank penalty fees and closed accounts are common, hidden costs of online payday loans, according to a Consumer Financial Protection Bureau report.

A consumer who receives an online payday loan provides their bank account information to the lending group, which submits drafts at scheduled intervals to collect loan payments.

When a draft is submitted to a customer’s account with insufficient funds, bank fees are incurred in the form of overdraft charges or nonsufficient funds (NSF) fees, and the payday lender often charges the customer a fee as well.

“Half of online borrowers are charged an average of $185 in bank penalties … in addition to any fees the lender might charge for failed debit attempts,” the report noted.

As a result, around 33 percent have their bank accounts closed either “for reasons such as having a negative balance for an extended period of time or racking up too many penalty fees.”

CFPB Director Richard Cordray stated, “Taking out an online payday loan can result in collateral damage to a consumer’s bank account. Bank penalty fees and account closures are a significant and hidden cost to these products.”

When Cordray testified before Congress in March on payday lending practices, he noted the “massive rates of interest and difficult collection practices … that creates a tremendous amount of consumer harm.”

The full CFPB report is available here.

Editor’s note: A free resource sheet on payday loans and predatory lending is available here.

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