A new report from the Consumer Financial Protection Bureau (CFPB) is startling — it states that half of those who take out online payday loans wind up paying an average of $185 in unexpected bank fees because at least one debit attempt for repayment either fails or overdrafts the borrower’s account. That’s in addition to an already expensive product. What’s more, a third of those borrowers end up having their bank accounts involuntarily closed.
So how do things spiral out of control? In an attempt to collect outstanding balances, online payday lenders often make repeated attempts to debit repayment from a customer’s account, which can result in multiple non-sufficient funds (NSF) fees from the bank. However, the odds of repayment with each repeated attempt do not improve. In fact, the CFPB data shows that roughly 70 percent of second and 73 percent of third repayment requests fail, and each subsequent attempt is even less likely to succeed — yet for each failed attempt, the consumer’s bank can charge an NSF fee.
It costs the lender very little to make repeated debit attempts, but they can be quite expensive to borrowers. As of 2012, the average bank NSF fee was $34, so it’s not hard to see how fees can quickly add up for consumers. Worse, many online lenders also charge their own returned payment fees and/or late fees.
I think that’s an unacceptable way to treat customers. So at LendUp, we do things differently.
For example, it’s our policy to attempt to collect repayment (with the borrower’s explicit authorization for each ACH withdrawal) from checking accounts only once, even when state law allows multiple attempts to withdraw money. If the funds aren’t present, we work with eligible borrowers to create a payment plan that works for them — without any additional fees to do so. In fact, our system allows past-due borrowers in eligible states to sign in to their LendUp accounts and create a payment plan for themselves at their convenience without the need to even contact a member of our (really friendly!) customer service team.
But even before payment is due, we’re proactive about eliminating NSF and overdraft fees. We’ve built smart technology that sets up our customers for success in several ways:
- Active reminders: As a loan payment date approaches, we send multiple free reminders via email and/or SMS to keep our borrowers informed and aware.
- Flexibility mid-loan: If circumstances change for our customers while they have loans out, the system we built is flexible enough to allow eligible customers to change their repayment date to something that works better for them.
- Payment plans: Many customers who can’t pay on their due date can break up their balance into smaller payments over time, all with no additional fees. Unlike many small-dollar lenders, we do not allow dangerous rollovers. While some state restrictions apply to what type of payment plans we can offer, and when, we’re always working on ways to make things easier for our borrowers.
- Smart repayment dates: If customers choose a repayment date that’s prior to their next pay date, we alert them; we’ve learned aligning these dates makes incurring NSF or overdraft fees less likely.
LendUp’s social mission principles promise customers our products will be transparent and structured to avoid the possibility of debt traps, and we’re proud these principles align with the CFPB’s ongoing attempts to protect consumers.
CEO and Co-Founder