The typical outsider’s view of payday lending involves seedy looking storefront shops in strip malls near pawn shops and bail bonds, so the idea of going to a short-term lender with a cleanly designed, professional website might seem more appealing (not to mention convenient). However, a new report finds that online payday loans may wreak more financial havoc than their bricks-and-mortar counterparts.

Most payday lenders use the Automated Clearing House (ACH) network to directly connect to borrowers’ bank accounts, allowing them to deposit and collect funds  electronically as needed.

A new report [PDF] from the Consumer Financial Protection Bureau found that these attempts by lenders to obtain payments directly from borrowers’ accounts often add a steep, hidden cost to online payday loans.

According to the CFPB, half of online payday loan borrowers incur an average of $185 in bank penalties because at least one debit attempt by lenders creates an overdraft or fails completely.

The findings, which are based on data collected over an 18-month period that looked at online payday and certain online installment loans made by more than 330 lenders, shine a light on the ways in which online lenders attempt to recover their money by debiting a consumer’s checking account.

In addition to simply extracting money from borrowers’ accounts when payments are due, the ACH system allows lenders to attempt multiple debit transactions against borrowers’ accounts when the first attempt fails.

Nearly 18% of borrowers experience multiple failed requests on the same day from the same lender.

For an already financially strapped borrower, this can lead to hundreds of dollars worth of overdraft fees, in addition to fees imposed by the lenders looking for repayment.

To add insult to injury, the CFPB report found that many lenders also split a single payment into multiple smaller debits in the hopes that the consumer’s account will contain enough money to fulfill at least a portion of the payment due.

For example, a lender may submit three $100 requests on a day the borrower is due to pay $300.

Of the $185 in average fees, around $97 comes from initial failed debit requests, $50 from resubmitted payment requests after a previous failure, and the remaining charges coming from lenders who submit multiple payment requests on the same day.

While only 6% of payment requests fail in the first place, a resubmitted payment will not be successful 70% of the time, the CFPB found.

Over the 18-month period examined by the CFPB, 36% of accounts that had a failed debit attempt were closed by the bank, typically within 90 days of the first non-sufficient fund transaction.

“The true costs of these loans, taken in the aggregate, must be kept in mind as we assess the effects on consumers, especially those who were already experiencing financial difficulties when they took out the loan in the first place,” CFPB director Richard Cordray told reporters on a call discussing the report. “As the Consumer Bureau has said all along, we believe that many people who live paycheck to paycheck need access to credit that can help them manage their financial affairs.  But we also believe that consumers deserve to have access to responsible credit that helps them rather than harms them.”

For those reasons, the CFPB began to craft rules meant to protect consumers from predatory payday lenders. More than a year ago, the CFPB announced a framework for rules for companies that provide payday loans, vehicle title loans, deposit advances, and certain high-cost installment and open-ended loans. The guidelines are intended to reduce the likelihood of borrowers falling victim to the vicious — and often devastating — cycle of debt associated with these financial products by preventing lenders from making loans that can’t be repaid.

As part of the draft, the Bureau is also taking aim at payment-collection practices that take money directly from bank accounts in a way that frequently hits the borrower with hefty fees.

While the CFPB’s new report highlights the additional dangers of online lending, consumer advocates are quick to point out that all payday lending can be devastating for borrowers.

“The release of this new data confirms what consumers and community groups already know.  It doesn’t matter if it’s online or on the corner — the payday lending industry relies on the debt trap,” Liz Ryan Murray, Policy Director of National People’s Action, a coalition of advocates, said in a statement. “The CFPB’s findings confirm the need for strong rules to rein in the entirety of the industry.”

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