There are 2 types of accounts established for payday loan companies.
First, ACH credits deposit the amount of the loan directly to the borrower’s bank account. ACH credit accounts require “cleared funds” prior to deposits being made. Lenders send the money for the credits to the ACH processor. Funds are then deposited to the borrowers' accounts.the credits.
Secondly, ACH or echeck accounts are established. These authorize repayment of the loan via a direct debit from the borrower’s bank account.
Lenders obtain authorization to access to a borrower's bank account to verify that the borrower has a source of income and to debit payments from the account.
Payday lenders use ACH credits to direct deposit the money for the the loan into borrowers' bank accounts.
Lenders use echecks to debit the amount of the loan repayment from the borrowers' bank accounts. Most lenders use echecks based on Check 21 technology.
ACH debits for repayment of loans is effective only for lenders that can keep returns under 15%. And revokes under 0.5%. These ratios are set by NACHA, the governing body of the ACH network.
Some lenders use echecks for the first loan payment. First transactions carry the greatest risk for returns and revokes. For recurring payments, after the first transaction, the lenders then switch to ACH debits.
Despite all the negative press about payday loans, and the restrictions by certain states against the payday loan industry, the loans are hugely popular. More than 12 million Americans take out payday loans each year, according to the Pew Charitable Trusts' Safe Small-Dollar Loans Research Project. The average amount of a loan is $375. The average borrower takes out 8 payday loans per year.
Surprisingly, most borrowers use loans for regular living expenses and not for emergency situations. Approximately 69% borrow to pay for recurring expenses, such as rent, mortgage, utilities, credit card payments or food.
Fees averaged $15 per $100 borrowed, which is equal to a 391% annual percentage rate. Generally rates are shown as fees rather than interest rates on payday loan websites and in the agreements between borrow and lenders. Borrowers stayed in the loan cycle for about 212 days per year.
About 55%, borrowers are white, and 52% are female. As would be expected, payday loan borrowers are classified as sub-prime since they are unable to borrow at more attractive rates.
About 75% of borrowers get loans from storefront payday lenders, including banks or companies that specialize in the payday loan market. Online loan origination is steadily increasing, with approximately 25% of borrowers applying via websites. Web originated loans are usually more expensive, average fees of $95 per $375 loan, compared to $55 fees for storefront loans.
The Consumer Financial Protection Bureau (CFPB) has the authority to regulate payday lenders at the federal level. Richard Cordray, the agency director, is making examination of payday lenders practices is a top priority. The agency is also aware that major banks offer payday loans. But, it’s not clear if these banks will be targeted for examination.
Payday lenders use ACH credits to direct deposit the money for loans into borrowers' bank accounts. For repayment of the loans, lenders use echecks or ACH debits to deduct the amount due from borrowers' accounts.
Although the payday loan industry has been under scrutiny for the past few years, it's not going away anytime soon. Millions of Americans rely on payday loans. Lenders are sure to continue to provide loans to satisfy the demands of the market.
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