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Each lender is lending blind
No shared tally
Traditional credit works differently: a credit bureau keeps track of everything a person owes. Here the underwriting is light and no one holds a running tally, so no lender can see the loans a borrower has taken elsewhere.
How borrowing stacks
Without that view, the loans stack up easily. People start with one, find they can't get by without them, and end up borrowing, paying down, and borrowing again and again, the same pattern payday loans follow. For many borrowers it becomes a financial trap that is close to impossible to get out of.
What a freeze does
Falling behind makes it worse. A late loan gets a credit line frozen until the borrower pays up, which cuts off the borrowing many people rely on for the following month.
Why does a soft credit check miss other loans?
Credit bureaus build their files from the lenders that choose to report to them. Credit cards and mortgages are typically reported every month, and a loan that is never reported does not appear in any file another lender can check. A soft inquiry reads the file without leaving a hard inquiry on it, but it can only show what the file contains. Reporting is voluntary for US lenders, and the Fair Credit Reporting Act sets accuracy rules for what is reported rather than a duty to report.
How are these loans like payday loans?
A payday loan is a short, small loan that comes due on the borrower's next payday, often collected by direct access to the bank account. Borrowers who cannot repay in full often roll the loan over or take out a new one. A 2014 study by the Consumer Financial Protection Bureau found that about four in five payday loans were rolled over or followed by another loan within two weeks. Most of the fees lenders collected came from borrowers caught in those repeat sequences.
Why wouldn't lenders check each other's loans?
A credit report pull costs a lender a fee, which weighs heavily on a loan of a few hundred dollars. Small loans also mean small losses when one goes unpaid, so a lender can accept some defaults rather than pay for deeper checks. A hard inquiry can also lower an applicant's score slightly, which many lenders avoid for a quick checkout approval. Hard inquiries stay on a credit report for two years.
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