Pay Day Loans Users Punished by Same Banks who Bounce their Checks
When banks won’t lend, people with poor credit often turn to pay day loans. When borrowing money from a bank, many factors are considered before a traditional financial institution will issue a loan, online or off. These factors include the borrower’s annual income, credit history and debt-to-income ratio. If a loan consumer fails the bank’s lending criteria, then the would-be borrower is likely to turn to alternate lenders such as payday loan companies. Some people reach out to their preferred credit card company while others turn to family members and friends. If a low credit score is the reason for the denial, then alternative borrowing options may be limited.
Pay day Loans for Those With Bad Credit a Necessity When Banks Refuse to Lend
When banks refuse to offer loans for people with bad credit, a number of these people turn to the payday loan industry for help. For many, the modern-day economy has been a tough one. Wages have stalled while many expenses continue to rise. This has created a situation that makes emergency cash hard to acquire. For borrowers with poor credit, advance pay day loans may be the only option.
What Does it Mean to Have Bad Credit?
Investopedia states that poor credit is a description of a person’s credit history when that history indicates that the individual is a high credit risk to lenders. When a person’s credit score is low, this signals bad credit while a high credit score is a sign that someone has good credit. Creditors who lend money to a person with bad credit know that they are facing a greater risk that the person will be late on payments or outright default compared to when they lend to those with good credit.
A person’s credit history is made up of several factors. These include the total amount of debt that an individual owes, access to available credit and payment timeliness. Poor credit occurs when a person makes late payments to his or her creditors. In the United States, the Fair Isaac Corporation, or FICO, determines credit scores based on information collected by the three main credit bureaus, which are Experian, Equifax and TransUnion.
Why do Pay Day Loan Lenders Overlook Low Credit Scores?
Pay day loan lenders have found a profitable niche. While some people continuously default on their credit and cause lenders to lose money, there are those who are working to rebuild a low credit score. In addition, because traditional financial institutions won’t typically lend to people with low credit scores, those who have one need access to lenders who will give them funds during a financial emergency.
Along with offering people the funds that they need, payday loan lenders make a tidy profit. According to a Center for Responsible Lending 2013 publication, consumers pay an estimated $3.4 billion in fees to payday loan lenders annually, so these lenders are certainly profiting.
A Genuine Demand for Small-Dollar Loans
A recent report published by the Consumer Financial Protection Bureau, or CFPB, states that the short-term loan industry “depends on people becoming stuck in these loans for the long term.” This is prompting the agency to propose regulations curbing it. However, instead of honing in on every type of payday loan, the CFPB is focusing on the loans that are causing customers the most harm. The agency believes that the most harmful loans are the ones that people roll over.
Richard Cordray, the head of the CFPB, said, “The agency is focused on cases where the subsequent loans are prompted by a single need for money. That is, the follow-on loans are taken out to pay off the same initial debt for the consumer.” Cordray admitted that borrowers who repay a paydayloan after using it to take care of an urgent situation like a car repair are likely benefiting from pay day internet loans. This shows that even the head of the CFPB knows that the country has a genuine need for pay day advance loan products and that the payday lending industry is satisfying that need. Traditional financial institutions could offer this service, but they don’t seem interested.
Why Aren’t Banks Offering Payday Advance Loans ?
To date, banks have yet to set up programs or products such as online payday advances for borrowers who have low credit scores. For traditional financial institutions, implementing these types of pay loan products may be more trouble than they’re worth. However, when banks won’t offer loans for people with bad credit, payday loans are one of the few options available to these individuals.
Borrowers who take out pay day loans should understand that it’s critical to be able to repay these loans as agreed, or they could face high overdraft fees and additional interest charges for financing their loans for longer periods if the money isn’t in the bank to cover any scheduled payments. Unfortunately, payday lenders don’t control these fees or receive money from them. Nerdwallet.com reports that short-term loans often generate hundreds of dollars in additional banking fees for unwary consumers.
High banking fees are common among borrowers who put off their payment obligations or can’t cover them. It’s critical to understand that these practices can result in consumers getting caught in debt traps. Payday loans–and even small-dollar installment loans–aren’t designed for long-term financing. The higher interest rates for short-term and payday loans, which are necessary to cover the high administrative costs of making short-term loans, can easily trap people in cycles of debt.
Bank charges for overdrafts increase the difficulty of getting out of debt, and banks often cancel bank accounts due to negative balances caused by multiple overdraft fees. The payday lending industry has been criticized by the Consumer Financial Protection Bureau for presenting debits multiple times, which can result in astronomical overdraft fees that run higher than the original loan obligation.
”Collateral Damage” Banking Fees for Bad Credit Pay Day Loans Generate Hundreds of Dollars in Expenses
The CFPB is expected to limit bank overdraft fees and the number of times an account can be debited for pay day loans with bad credit. Americanbanker.com reported that banks are raising their fees in a proactive effort to protect this revenue stream from mandatory limits to the number of times banks can charge overdraft fees for a single transaction.
When banks try to debit accounts for payday cash advances or any other type of payment, they check to see if there is enough money in the account to cover the transaction. If there are insufficient funds, banks charge an overdraft fee, which usually runs about $35, and deny the payment. Companies that offer loans online, pay day loans and other types of paycheck advances want to get their money, so many try to debit the account multiple times to get what’s legally owed to them. Overdraft fees can snowball and rack up huge negative balances while the lenders receive nothing.
This financial burden–which generates millions of dollars for banks–pushes people out of the banking system and forces them to use alternative arrangements for electronic payments. This adds yet one more expense to the cycle of debt. The original obligation remains and any penalties, fees, increases in interest rates and late charges that get started. That’s why many consumers get trapped in debt.
Payday Internet Loans Generate Contentious Political Posturing and Calls for Reform
Payday internet loans aren’t the only financial products that are subject to higher interest rates and overdraft fees because internet loans, mortgages and credit card payments also generate steep fees for overdrafts. A Mobile.NYTimes.com report found that most short-term loans–about 94 percent–went through without problems. This information comes from a study released by the CFPB after 18 months of studying 20,000 accounts. However, some payday loan companies tried to debit borrowers’ bank accounts multiple times on the same day.
This practice can easily create a domino effect on service charges. CFPB director Richard Cordray commented, “Lenders that are owed money are entitled to get paid back, but we do not want lenders to be abusing their preferential access to people’s accounts.” Supporters of payday advance lenders suggest that the banks are at fault for charging predatory overdraft fees for electronic transactions that cost almost nothing to process.
JPMorgan Chase pledged more than two years ago to charge only one overdraft fee per month for payday loans, which eliminates the problem while allowing lenders to try to get their money. Overdraft fees add hundreds of dollars to all types of credit transactions, loans online and other checking and electronic payments including mortgages, student loans, utility payments, credit card debts and automobile financing.
Bank Fees for Bad Credit Loans Aren’t the Responsibility of Payday Lenders
People who get bad credit loans often can’t afford to repay their obligations, and when they fail to pay on time, they get hit with paying interest for an extended time and are subject to overdraft fees from banks and creditors for each refused payment and penalty interest rates that surpass their original agreements. Regardless of who is charging these fees and penalties, some consumer advocates consider these costs as predatory because they take advantage of people who are having financial difficulties.
Banks charge overdraft fees and utility companies charge late fees and reconnection charges. Failure to repay your student loan could result in fees, penalties, increased interest charges and cancellation of your college registration, withholding of your diploma or degree and other sanctions according to Northwestern.edu, which serves as a typical example of student loan policies.
These costs can create a domino effect that leads to cycles of debt. The CFPB has strongly attacked the pay day lending industry for perpetuating cycles of unmanageable debt, but the evidence shows that other financial organizations, utility companies, student loan lenders and credit card companies also benefit from fees, penalties and interest rates that generate debt traps for consumers.
Related Fees that Being Short of Cash Can Generate
Poor credit advance loans and internet loans of all types can result in astronomical charges when consumers can’t afford to pay their obligations. According to Scholarship.law.unc.edu, the bank shuffle is a common industry practice. This sleight-of-hand is perpetuated by banks to earn higher overdraft fees. When payment processors discover more debt than an account balance can cover, they’ll pay the highest amounts first. This results in more overdrafts for smaller amounts, which generate higher fees. Any bank could choose to bounce only one high-dollar transaction and earn one $35 fee, but most of them choose to pay the high-dollar transactions and bounce several smaller transactions and earn hundreds of dollars in fees.
Credit card companies routinely raise interest rates when consumers are late on only one payment. Other costs include annual processing fees, balance-transfer fees and standard late fees. These penalties increase bank revenue streams, but they’re never reflected in annual interest rates.
Payday loans remain tremendously popular with families who have no savings and few resources in a cash emergency, and online payday advances provide cushions during periods when cash flow is tight. Critics of increased financial regulations routinely defend a lender’s right to charge high enough interest rates to earn reasonable profits on their investments. Bank overdraft fees are expenses that the short-term payday cash advance industry doesn’t control, and these lenders don’t receive anything from these fees. Learn more at the Personal Money Store.